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ELEMENTS 

OF 

POLITICAL  ECONOMY 


^^n^^. 


E.  LEVASSEUR 


ELEMENTS 

OF 

POLITICAL  ECONOMY 


Translated  by 
THEODORE    MARBURG,  M.A. 


Portions  of  the  treatise  were  rewritten 
by  the  author  for  the  translator;  other 
additions  and  changes  made  by  the 
translator  himself  were  approved  by 
the  author 


THE  MACMILLAN  COMPANY 

LONDON:  MACMILLAN  &  CO.,  Ltd. 
1905 

All  rights  resrrved 


CopysiGHT,  igos 
By  THE  MACMILLAN  COMPANY 


Set  up  and  electrotyped.    Published 
May,  igos 


THE  MASON  PRESS 

SYRACUSE      •     NEW  YORK 


H3 

175 

PREFACE  ' 


Any  one  taking  up  the  study  of  political  economy  may 
easily  find  himself  a  wanderer  in  the  wilderness.  Invit- 
ing by-paths  lead  him  astray  in  a  mass  of  literature,  much 
of  it  irrelevant,  or,  if  relevant,  not  important,  and 
crowded  with  conflicting  theories.  In  the  field  of  the 
physical  sciences  a  new  discovery  may  cause  a  theory 
which  to-day  is  in  a  compartment  near  the  truth  to  be 
moved  definitely  to-morrow  close  to  the  "compartment  of 
absolute  error."  But  such  definite  reasoning  is  more 
difficult  when  we  enter  the  field  of  a  science  which  deals 
with  the  subtle  and  changing  phenomena  of  human  mo- 
tive. In  political  economy  the  new  theory  comes  in,  fre- 
quently not  as  successor  but  as  permanent  and  confusing 
rival  of  the  old.  For  this  reason  there  are  few  studies  in 
which  there  exists  the  same  need  for  the  discriminating 
mind  to  separate  the  more  valuable  from  the  less  valuable, 
and  to  help  the  student  to  choose  aright  among  contend- 
ing theories. 

This  small  volume  of  three  hundred  pages  by  Emile 
Levasseur  appealed  to  the  translator  as  one  of  the  books 
on  economics  which  fulfill  this  need.  We  find  in  Levas- 
seur an  unusual  balance.  Moreover,  the  ripe  knowledge 
resulting  from  his  long  and  eminent  career  as  a  student 
and  teacher  of  political  economy,  together  with  his 
familiar  and  constant  contact  with  the  best  minds  in 
France,  and  the  clearness  of  presentation  which  char- 
acterizes his  writings  in  common  with  so  much  of  the 
work  of  French  thinkers,  combine  to  fit  him  for  such 
a  task.  In  a  recent  communication  to  the  translator, 
he  himself  says  of  the  little  book  :  "  I  believe  that  it 
contains  sound  views  of  essential  principles,  and  that 
the  ideas  are  expressed  in  a  clear  and  didactic  form, 

V 


vi  Preface 

My  lectures  are  not  confined  to  this  little  volume ; 
they  change  according  to  the  times  and  the  needs  of 
the  moment;  I  have  never  given  the  same  course  two 
years  in  succession.  But  I  have  remained  true  to  the 
fundamental  principles  of  economic  science,  and  it  is 
precisely  these  principles  which  form  the  basis  of  this 
book."  Translator. 


CONTENTS 
INTRODUCTION 

I.  Object  of  Political  Economy.  2.  Purposes  of  Political 
Economy.  3.  Definition.  4.  Method  of  Political  Econ- 
omy and  the  Relation  of  Political  Economy  to  Other 
Sciences.  5.  Principal  Divisions.  6.  Economic  Need  and 
Its  Satisfaction.  7.  Utility  and  Wealth.  8.  Productive 
Forces.    9.  Definition  of  Other  Terms i-iS 

PART  I 

PRODUCTION  OF  WEALTH 

CHAPTER  I 

Production  and  Its  Conditions 

10.  Sources  of  Production.  11.  General  Conditions  of  Pro- 
duction      16-19 

CHAPTER  II 

Nature 

12.  Nature  and  Natural  Agents.     13.  Land 19-27 

CHAPTER  III 

Labor 

14.  Labor.  15.  Physical  Labor  and  Manual  Labor.  16.  In- 
tellectual Labor.  17,  Art  and  Science  in  Industry.  18. 
The  Role  of  Science  in  Production.  19.  Service  of  Intel- 
lect Cheap  and  often  Gratuitous.    20.  Intellectual  Capital      27-45 


viii  Elements  of  Political  Economy 

CHAPTER  IV 

Capital 

21.  Saving.  22.  Capital  and  the  Fund  for  Consumption.  23. 
Renewal  of  Capital.  24.  Importance  of  Capital  to  Pro- 
duction. 25.  The  Role  of  Capital  in  Relation  to  Labor. 
26.  Productive  and  Unproductive  Capital.  27.  Fixed 
Capital.  28.  Machinery.  29.  Influence  of  Machinery  on 
the  Intellectual  Condition  of  the  Laborer.  30.  Machinery 
and  the  Displacement  of  Labor.    31.  Circulating  Capital  .      45-69 

CHAPTER  V 
Industrial  Organization 

32.  Cooperation  and  Division  of  Labor.  33.  Classification  of 
Industries.  34.  The  Role  of  the  Entrepreneur  and  of  the 
Wage-Earner.  35.  Association.  36.  Industrial  Corpo- 
rations. 37.  Historic  Review  of  Trades  and  Trade  Regu- 
lations in  Europe.  38.  Establishment  of  Freedom  of  Con- 
tract. 39.  Advantages  of  Freedom  of  Contract.  40. 
Competition 69-89 


PART  II 

DISTRIBUTION  OF  WEALTH 

CHAPTER  I 

Property 

42.  Property.  43.  The  Right  to  Transmit  it.  44.  Com- 
munist Criticism  of  Property.  45.  The  Three  Factors  in 
Production  Entitled  to  Remuneration 90-100 

CHAPTER  II 

The  Role  of  Capital 

46.  Systems  Under  Which  Land  Is  Cultivated  and  the  Role 
of  Landed  Capital.  47.  The  Size  of  Farms.  48.  Small 
Holdings.  49.  The  Rent  of  Land.  50.  The  General 
Theory  of  Rent  51.  The  Cooperation  of  Capital.  52. 
Gratuitous  Credit  Impossible.  53.  The  Rate  of  Interest. 
54.  The  Conservation  of  Capital 100-117 


Contents  ix 

CHAPTER  III 

The  Profit  of  the  Enterpreneur 
55.  The  Profit  of  Enterprise.    56.  The  Dividend  ....  1 17-120 

CHAPTER  IV 

The  Role  of  Labor 

57.  The  Wage  System.  58.  Rate  of  Wages.  59.  Day  Labor 
and  Piece-Work,  and  the  Hours  of  Labor.  60.  Labor 
Unions.  61.  Profit-Sharing.  62.  Cooperative  Societies. 
63.  Criticism  of  the  Wage  System.  64.  Socialist  Doc- 
trines on  the  Distribution  of  Wealth 120-143 

CHAPTER  V 

Population  and  Pauperism 

65.  Population,  Production  and  Consumption.  66.  The 
Causes  of  Density  of  Population.  67.  Malthus  and  the 
Equilibrium  of  Population  and  Wealth.  68.  Emigration 
and  Colonization.  69.  Poverty  and  Pauperism.  70.  As- 
sistance      143-164 

PART  III 

THE  CIRCULATION  OF  WEALTH 

CHAPTER  I 
Exchange  and  Value 

71.  Exchange.  72.  Offer  and  Demand,  Competition  and  Mo- 
nopoly. 73.  Fundamental  Conditions  of  Value.  74- 
Causes  of  Variation  of  Value.  75.  Distinction  Between 
Value  and  Wealth.     76.  Prices 165-184 

CHAPTER  II 

Money 

77.  The  Nature  and  Role  of  Money.  78.  The  Advantages 
of  the  Precious  Metals  as  "Money.  79.  The  So-called 
"Double  Standard."  80.  Subsidiary  Money.  81.  Mone- 
tary Systems.    82.  The  Value  of  the  Precious  Metals  .      .  184-202 


X  Elements  of  Political  Economy 

CHAPTER  III 
Credit 

83.  Nature  of  Credit.  84.  Influence  of  Credit.  85.  Principal 
Kinds  of  Credit.  86.  Commercial  Paper.  87.  The  Role 
of  Banks.  88.  The  Mechanism  of  Banks.  89.  Bank 
Notes.    90.  Deposits,     Discounts     and     Circulation.    91. 

.     Paper  Money.    92.  Manner  of  Issuing  Bank  Notes.    93. 

American  and  Leading  European  Banking  Systems      .       .  202-242 

CHAPTER  IV 

Commerce 

94.  Commerce.  95.  Domestic  Commerce  and  Foreign  Com- 
merce. 96.  Imports  and  Exports.  97.  Duties,  Protection 
and  Free  Trade.  98.  General  and  Special  Trade,  and 
Transit.  99.  Exchange.  100.  Commercial  Crises.  loi. 
Commercial  Geography  and  Foreign  Competition.  102. 
The  Role  of  Commerce  in  Civilization 242-268 

PART  IV 

Consumption 

103.  The  Various  Kinds  of  Consumption.  104.  Productive 
Consumption.  105.  Outlays  for  Capital  and  Education. 
106.  The  Consumption  of  Capital  by  Labor  and  Produc- 
tion. 107.  Unproductive  Consumption.  108.  Luxuries. 
109.  Preservative  Consumption,  no.  The  Mechanism  of 
Insurance,     in.  Different  Forms  of  Insurance      .      .      .  268-284 

PARTY 

,  Finance 

112.  Consumption  by  the  State  and  the  Principle  of  Taxation. 

113.  Distributing  the  Burden;  Single  and  Multiple  Taxes. 

114.  Direct  and  Indirect  Taxes.  115.  Classification  of 
Taxes.  116.  Budgets.  117.  Necessary  and  Facultative 
Expenditures.  118.  Local  Budgets.  119.  Loans.  120. 
Debts 285-306 


ELEMENTS  OF 
POLITICAL  ECONOMY 

INTRODUCTION 

Summary. — i.  Object  of  Political  Economy.  2.  Purposes  of  Po- 
litical Economy.  3.  Definition.  4.  Method  of  Political  Economy 
and  the  Relation  of  Political  Economy  to  Other  Sciences.  5.  Princi- 
pal Divisions.  6.  Economic  Need  and  Its  Satisfaction.  7.  Utility 
and  Wealth.    8.  Productive  Forces.     9.  Definition  of  Other  Terms. 

I.  The  Object  of  Political  Economy. — All  over  the 
world  and  in  all  times  men  have  devoted  themselves  to 
certain  occupations  and  have  maintained  with  one  an- 
other certain  industrial  relations  with  the  object  of  either 
creating  products  or  obtaining  a  remuneration,  and  of 
thereby  satisfying,  directly  or  indirectly,  the  needs  of  life. 
They  have  kept  cattle,  followed  the  chase,  cultivated  the 
soil,  forged  iron,  practiced  handicrafts,  let  their  services, 
transported  merchandise  on  land  and  sea,  and  sold  to  one 
man  that  which  they  bought  from  another.  Nothing 
could  be  more  varied  than  these  occupations  and  relations. 
But  beneath  this  diversity  of  phenomena  one  perceives 
something  constant,  namely,  the  intention  to  create  a 
utility. 

On  closer  inspection  one  perceives  still  other  constants. 
The  farmer  does  not  produce  wheat  from  his  field  by  the 
same  process  that  the  smith  employs  in  shaping  a  pruning 
knife  on  his  anvil,  nor  by  the  process  the  weaver  employs 
in  order  to  cause  his  loom  to  yield  a  fabric.     For  the  pro- 

I  I 


2  Elements  of  Political  Economy 

duction  of  wheat,  a  pruning  knife  or  a  fabric,  however, 
there  is  required  work,  utensils,  material,  and  almost  al- 
ways the  assistance  of  others,  as  well  as  the  exchange  of 
certain  products  for  other  products. 

We  have  here  a  group  of  phenomena  of  a  particular 
order  which  repeat  themselves  constantly  under  like  con- 
ditions; we  have  consequently  material  for  a  special  sci- 
ence.    That  science  is  political  economy. 

We  may  say :  political  economy  has  for  its  object  the 
study  of  phenomena  relating  to  the  production  of  utilities. 
These  utilities  are  called  wealth. 

2.  The  Purpose  of  Political  Economy. — By  observ- 
ing these  phenomena,  political  economy  attains  to  a  knowl- 
edge of  the  general  laws  which  govern  the  production,  the 
movements,  and  the  consumption  of  wealth :  this,  above 
all,  is  the  purpose  of  the  science.  The  first  aim  of  every 
science  is  to  lift  the  mind  of  man  to  the  plane  of  truth  and 
thus  to  assist  it,  through  some  one  channel,  to  a  percep- 
tion of  the  order  which  reigns  in  the  affairs  of  the  world. 

Like  all  sciences,  however,  political  economy  has  a 
practical  use.  As  man  reaches  a  fuller  understanding  of 
the  natural  laws^  which  govern  economic  facts  and  rela- 
tions, he  comprehends  more  clearly  the  mechanism  of 
social  life;  he  is  better  equipped  to  direct  his  affairs  no 
matter  what  career  he  may  follow;  he  becomes  broader, 
and,  consequently,  less  likely  to  be  swayed  by  the  preju- 
dices and  passions  which  disturb  the  multitude  and  which 

'  So  used,  the  word  law  means  simply  an  effect  following  a  cause. 
Thus,  if  you  cast  yourself  from  a  height  you  are  apt  to  be  killed  by 
the  operation  of  the  natural  law  of  gravitation.  Law  in  this  sense  is 
very  different  from  human  law,  which  enjoins  a  certain  course  of  con- 
duct upon  men.  The  object  of  a  study  of  natural  laws,  which  includes 
economic  laws,  is  to  avoid  bringing  into  play  such  of  them  as  are 
harmful  and  to  court  the  operation  of  such  as  are  beneficial. —  Trans- 
lator. 


Introduction  3 

at  times  prove  troublesome  to  the  state;  he  can  see  more 
clearly  the  ameliorations  to  be  introduced  in  the  insti- 
tutions of  his  country,  and,  if  he  should  at  any  time  ac- 
quire a  voice  in  public  councils,  can  the  more  readily  indi- 
cate reforms  which  are  neither  Utopian  nor  suggested  by 
private  interest.  Political  economy  does  not  produce 
infallibility  any  more  than  any  other  science;  but  it  is 
eminently  useful  for  the  triple  reason  that  it  makes  the 
judgment  sounder  upon  economic  questions,  is  helpful  in 
the  conduct  of  private  affairs,  and  is  necessary  for  a 
proper  comprehension  of  public  affairs. 

3,  Definition. — The  expression  "political  economy" 
is  from  the  Greek  words  olko<s  vo'/xos  ttoXis,  which  signify 
the  art  of  administering  wealth  in  social  communities. 
It  is  a  very  different  thing  from  economy,  which,  in 
its  narrow  sense,  is  a  private  virtue  consisting  in  spending 
only  what  is  strictly  necessary — and  a  different  thing  from 
politics,  which  is  the  art  of  governing  the  state.  The  ex- 
pression social  economy  is  sometimes  regarded  as  a  vari- 
ant of  political  economy,  although  it  is  a  science  some- 
what more  extended;  the  expression  "economic  science" 
would  be  more  precise. 

It  has  been  justly  said  :  Political  economy  is  the  phil- 
osophy of  human  industry ;  though  this  is  a  lofty  view  of 
economic  science  rather  than  a  definition.  Industry  is 
only  a  branch  of  social  life,  and  economic  science  is  ac- 
cordingly only  a  part  of  social  science. 

To  say  that  political  economy  is  the  science  of  utility  is 
too  vague ;  and  to  say  that  it  is  the  science  of  exchange  or 
the  science  of  value  is  to  give  it  too  narrow  a  definition. 
Political  economy  is  the  science  of  wealth :  this  consti- 
tutes a  true  definition.  Adam  Smith,  by  calling  his  work 
"An  Inquiry  Into  The  Nature  and  Causes  of  The  Wealth 


4  Elements  of  Political  Economy 

of  Nations"  has  given  a  definition  which  is  not  less  true^ 
and  which  is  more  expHcit.  One  might  prefer  the  follow- 
ing definition,  which,  although  somewhat  long,  is  yet  more 
complete :  Political  Economy  is  a  moral  science  which  has. 
for  its  object  the  study  of  the  natural  laws  under  which 
man  in  the  social  state  produces,  partitions,  exchanges  and 
consumes  wealth ;  and  one  might  even  add ;  the  science 
which  has  likewise  for  its  object  the  study  of  the  institu- 
tions relating  to  wealth  and  of  the  effects  of  these  institu- 
tions upon  the  national  welfare,  although  this  latter  ap- 
pertains to  the  art  of  government  rather  than  to  economic 
science. 

4.  The  Methods  of  Political  Economy  and  the  Rela- 
tion of  Political  Economy  to  Other  Sciences.  —  Political 
economy  is  a  science  of  observation.  It  is,  moreover,  a 
moral  science,  since  wealth  is  the  product  of  labor  and  of 
human  will. 

It  occupies  a  peculiar  rank  among  the  moral  sciences,, 
because,  having  for  its  subject  the  wealth  which  man 
creates  and  consumes,  it  studies  at  the  same  time  the 
product  and  the  producer,  material  objects  and  man;  it 
seems  to  have  one  foot  on  the  domain  of  the  natural  sci- 
ences and  the  other  on  the  domain  of  the  moral  sciences. 
It  is  to  this  last  that  it  really  belongs,  because  the  work- 
man is  superior  to  the  material  which  he  fashions,  and 
because  man,  creating  and  consuming  wealth,  is  at  the 
same  time  the  active  source  and  the  end  of  economic  activ- 
ity. It  is  thus  that  jurisprudence,  for  example,  becomes  a 
moral  science,  although  it  concerns  itself  partly  with  the 
regulation  of  a  material  thing,  property. 

This  mixed  character  has  at  times  proven  an  injury  to 
political  economy.  The  natural  sciences  have  reproached 
it  with  lacking  the  kind  of  precision  to  which  they  are 


Introduction  5 

accustomed,  and  the  moral  sciences  have  hesitated  to  ad- 
mit it  to  sisterhood  because  they  found  it  too  much 
steeped  in  the  material.  To  avoid  these  errors  it  suffices 
to  give  a  full  account  of  its  true  nature. 

Political  economy  proceeds  by  the  observation  of  facts 
relating  to  wealth ;  it  neglects  that  which  is  peculiar  or 
accidental,  and  deduces  the  economic  laws  from  general 
traits  which  it  collects. 

In  this  observation  of  general  traits  it  is  supported  by 
statistics,  which  may  be  defined  as  the  numeric  study  of 
social  facts.  All  the  facts  which  interest  economic  sci- 
ence are  not  of  such  a  nature  that  they  can  be  made  the 
object  of  statistical  enumeration,  and,  moreover,  that 
enumeration  is  not  necessary  to  the  verification  of  the 
more  general  phenomena  which  it  examines.  Neverthe- 
less, statistics  constitute  a  study  indispensable  to  a  correct 
knowledge  of  the  general  mechanism  of  societies.  Al- 
though it  furnishes  documents  to  other  branches  of  knowl- 
edge as  well,  it  is  above  all  the  auxiliary,  and  for  many 
questions,  the  lamp  of  political  economy.  It  may  be  con- 
sidered in  some  measure  as  laying  the  foundation  for  the 
study,  but  it  can  itself  be  handled  with  profit  and  safety 
only  by  a  person  already  conversant  with  economic  science, 
just  as  a  discourse  on  chemistry  could  be  safely  prepared 
only  by  a  person  familiar  with  chemistry. 

Conjointly  with  other  moral  sciences,  political  econo- 
my borrows  from  philosophy  the  knowledge  of  the  more 
powerful  springs  of  human  activity,  and  by  its  own  re- 
sults proves  their  efficacy;  it  seeks  solely  the  useful,  but  it 
confirms  the  precepts  of  morality  by  showing  experi- 
mentally that  the  useful,  considered  in  the  ensemble  of  the 
social  relations,  conforms  to  the  just ;  it  borrows  examples 
and  lessons  from  history,  examining  the  long  series  of 


6  Elements  of  Political  Economy 

experiences  through  which  human  society  in  its  economic 
organization  has  passed,  and  it  enHghtens  the  historian 
as  to  the  reasons  for  national  prosperity  or  decay ;  it  ques- 
tions geography  which  tells  it  of  the  influences  exercised 
by  the  soil  and  by  climate  on  production  and  commerce, 
and  helps  it  to  trace  wealth  back  to  its  causes. 

Frequently  it  finds  itself  on  common  ground  with 
jurisprudence,  inasmuch  as  jurisprudence  in  determining 
contracts  and  the  nature  of  property,  steps  in  to  regu- 
late certain  personal  relations  in  the  fields  of  production, 
distribution,  exchange,  and  even  the  consumption  of 
wealth.  But  political  economy  treats  of  the  natural  laws 
governing  the  economic  relations  of  persons  and  things. 
It  examines  the  influence  which  these  positive  laws  exer- 
cise on  wealth,  and  it  may  indicate  to  the  legislator  who 
prepares  new  laws,  the  true  end  to  be  attained  and  the 
course  to  pursue  with  respect  to  it. 

5.  Principal  Divisions.  —  The  main  divisions  of  a 
treatise  on  political  economy  correspond  to  the  three  broad 
phases  of  the  evolution  of  wealth. 

The  first  thing  is  to  create  wealth ;  political  economy 
studies  the  production  of  wealth :  first  phase  of  the  evolu- 
tion. In  the  social  state  it  is  very  difficult,  almost  im- 
possible, for  men  to  create  wealth  without  having  re- 
course to  their  fellows  either  for  material  and  tools,  or 
for  the  direct  cooperation  of  their  labor ;  it  is  likewise  but 
seldom  that  certain  populations,  particularly  urban  popula- 
tions, themselves  employ  all  the  products  they  create. 

Now  those  who  have  contributed  to  the  creation  of 
wealth  share  in  the  product :  this  is  what  political  economy 
studies  under  the  name  of  the  partition  or  distribution  of 
wealth.  Distribution  being  a  result  of  cooperation,  and 
consequently  one  of  the  phenomena  of  production,  is  con- 


Introduction  7 

fused  with  production  and  put  under  the  same  heading  by 
certain  economists. 

It  is  under  the  name  of  exchange  that  poHtical  econo- 
my studies  the  movement  of  wealth  which  passes  from 
proprietor  to  proprietor  by  exchange;  this  is  the  second 
phase  of  the  evolution  of  wealth  and  the  third  division  of 
the  science. 

At  length,  when  wealth  has  reached  its  final  destina- 
tion, it  is  used  up.  The  thing  created  by  human  industry 
is  destroyed,  or  at  least  ceases  to  exist  in  commerce ;  fol- 
lowing the  economic  expression,  it  is  consumed.  This 
is  the  aim  and  end  of  production.  Consumption  is  the 
third  phase  in  the  evolution  of  wealth  and  the  fourth 
division  of  the  science. 

As  wealth  is  made  by  man  for  man,  and  is  consumed 
by  him,  the  question  of  population  occupies  an  important 
place  in  the  study  of  consumption,  and  in  the  whole  field 
of  economic  science;  so  likewise  does  the  question  of  the 
state,  which  is  charged  with  the  common  interest  and  ad- 
ministers under  the  head  of  finance  a  portion  of  the 
national  wealth.  Next  to  the  people  considered  as  a 
whole,  the  state  is  the  largest  consumer. 

We  have  then  three  phases  of  wealth,  and  a  treatise 
on  political  economy  may  be  divided  into  four  parts  : 

I  St  phase  (ist  and  2nd  parts)  :  Production,  distribu- 
tion. 

2nd  phase  (3rd  part)  :  Exchange. 

3rd  phase  (4th  part)  :  Consumption  (by  the  people 
and  through  public  disbursements.) 

In  economic  science,  as  in  all  sciences,  it  is  by  an 
effort  at  anaylsis  and  abstraction  that  we  shape  the  princi- 
pal divisions  of  the  subject.  In  reality  the  phenomena  are 
quite  complex.       Thus  the  manufacturer  in  creating  a 


8  Elements  of  Political  Economy 

product  consumes  several  others ;  he  distributes  amongst 
those  cooperating  with  him  the  wealth  produced,  and  he 
at  the  same  time  causes  Wealth  to  be  exchanged  by  his 
purchases  and  his  sales. 

6.  Economic  Need  and  Its  Satisfaction. — Why  does 
man  produce?  In  order  to  satisfy  his  needs,  of  which  the 
most  pressing  is  the  need  to  live. 

If  a  man  in  good  health  should  go  without  nourish- 
ment for  a  day  he  would  suffer  from  hunger;  if  he  con- 
tinued without  it,  it  would  not  be  long  before  he  perished : 
man  must  needs  eat  to  live.  If  a  man  in  our  climate 
should  go  naked  he  would  suffer  cruelly  in  winter  from 
cold,  and  would  find  himself  uncomfortable  in  other  sea- 
sons :  man  must  needs  clothe  himself.  In  the  same  way 
he  would  suffer  from  heat,  rain,  and  from  the  chill  of 
night  unless  he  had  a  shelter :  he  must  needs  be  lodged. 
He  requires  it  not  only  for  protection  against  the  ele- 
ments, but  as  a  place  for  the  movables  he  uses,  often  as  a 
place  in  which  to  follow  his  trade,  and  as  a  domestic  hearth 
around  which  his  family  may  assemble. 

The  need  of  nourishment,  clothing  and  lodging  are  not 
the  only  needs  which  man  in  civilized  society  has  to  sat- 
isfy. He  feels  a  longing  for  instruction  and  recreation, 
and  this  longing  engenders  needs. 

Man  thus  experiences  a  great  number  of  needs  diverse 
in  their  nature  and  importance.  Some  of  them,  like  the 
need  of  nourishment  and  lodging,  must  be  satisfied  under 
pain  of  death  or  suffering;  others  there  are  of  which  the 
satisfaction  is  simply  useful  or  agreeable.  The  number  of 
these  latter  needs,  which  is  indefinite,  varies  according 
to  the  particular  fortune  of  each  individual  and  in  a  given 
society  increases  as  a  rule  proportionately  as  the  mass 
of  wealth  in  that  society  becomes  greater. 


Introduction  g 

For  example,  a  savage  feels  no  need  of  instruction ; 
he  hardly  feels  the  need  of  clothing  and  lodging.  All 
civilized  men,  on  the  other  hand,  regard  instruction  as  an 
absolute  need,  not  for  the  material  life,  but  for  the  life 
intellectual,  and  this  need  becomes  the  more  pressing  ac- 
cording as  they  understand  more  fully  how  good  instruc- 
tion adds  to  the  dignity  of  man  and  to  the  general  progress 
of  society. 

When  man  feels  a  need  he  desires  to  satisfy  it.  If  he 
cannot,  he  suffers,  and  the  suffering  is  the  more  lively  ac- 
cording as  the  need  is  the  more  pressing. 

The  man  who  is  hungry  has  his  repast,  and  the  need 
of  nourishment  he  has  experienced  is  satisfied.  The  man 
who  experiences  aches  and  pains  summons  his  physician, 
who  proceeds  to  apply  his  remedies  and  in  a  few  days  the 
need  of  medical  aid  he  has  felt  is  perhaps  satisfied. 

The  satisfaction  of  economic  needs  is  accordingly  ac- 
complished by  consuming  material  wealth,  or  by  receiving 
service  from  others. 

We  say  "economic  needs"  because  man  experiences 
other  needs,  particularly  those  of  a  moral  order  such  as 
the  need  for  friendship  or  sociability  which  can  be  satis- 
fied neither  by  the  consumption  of  wealth  nor  by  paid  serv- 
ice. These  purely  moral  needs  and  the  sentiments  which 
they  inspire  are  far  from  unimportant  to  the  economic 
life  of  the  nation ;  but  their  study  is  properly  the  province 
of  morals  and  philosophy. 

To  satisfy  an  economic  need  requires  effort  and  sacri- 
fice consisting  of  labor  or  outlay.  Under  what  conditions 
will  man  make  this  effort? 

The  savage  beholds  a  deer  pass  in  the  forest ;  he  knows 
the  habits  of  the  animal,  and  he  might  follow  it  and  per- 
haps overtake  it  after  several  hours'  pursuit.     If  he  is 


lo  Elements  of  Political  Economy 

impelled  by  hunger  he  will  not  hesitate,  no  matter  how 
much  trouble  it  involves,  to  seek  to  satisfy  his  imperious 
need  of  food.  In  yonder  tree  sits  a  fine  bird  whose 
plumage  might  serve  to  adorn  his  person ;  but  the  savage 
is  fatigued,  to  approach  he  must  cross  a  river  and  he 
lets  the  bird  go.  If  he  had  been  at  the  foot  of  the  tree 
he  might  have  taken  the  trouble  to  let  fly  an  arrow  and 
would  have  thus  satisfied  the  unimportant  need  of  per- 
sonal adornment. 

It  is  the  same  with  civilized  man.  Many  people  like 
to  own  fine  jewelry ;  but  to  procure  it  requires  a  large  out- 
lay, and  those  who  are  not  rich  enough  arrive  at  the  con- 
clusion that  the  sacrifice  of  money,  otherwise  called  effort, 
would  be  too  great  relatively  to  the  satisfaction  of  a  need 
which  is  not  pressing;  they  let  the  jewels  be,  and  they 
are  right. 

There  are  some  people  who  do  not  know  how  to  cal- 
culate the  relation  of  effort  to  satisfaction;  such  people 
manage  their  affairs  badly.  Amongst  them  is  the  class 
of  spendthrifts  who  squander  their  money  on  trivial  needs 
and  presently  lack  the  means  to  satisfy  urgent  needs. 

We  might  sum  up  what  precedes  by  saying  that  in  eco- 
nomic action  there  are  three  terms :  two  extreme  terms, 
need,  which  torments,  and  satisfaction,  which  appeases, 
and  the  middle  term,  effort,  which  procures  the  satisfac- 
tion. 

7.  Utility  and  Wealth. — To  procure  the  satisfaction 
of  an  economic  need,  we  must  either  consume  wealth  or 
receive  service  from  others,  i.  e.,  consume  utility.  The 
latter  expression  cannot  be  understood  without  explana- 
tion. 

A  field  is  useful  because  it  produces  crops.  The  wheat 
which  one  harvests  is  useful  because  it  nourishes  us.     A 


Introduction  1 1 

house  is  useful  because  it  serves  as  a  lodging.  A  hat  is 
useful  because  it  covers  the  head.  A  steam-engine  is  use- 
ful because  it  furnishes  motor  force.  A  diamond  is  useful 
because  it  satisfies  the  taste  for  personal  adornment.  A 
book  is  useful  because  it  instructs.  The  doctor's  visit 
is  useful  because  it  procures  for  the  invalid  the  counsels  of 
science.  Everything  calculated  to  satisfy  a  need  possesses 
utility;  a  thing's  utility  consists  precisely  in  the  capacity 
which  it  has  to  satisfy  man's  needs. 

It  is  nearly  always  man  who  gives  to  things  their  util- 
ity by  his  work ;  for  example,  he  digs  ore  from  the  bowels 
of  the  earth;  with  the  ore  he  makes  iron;  with  the  iron, 
machines.  Ore,  iron,  machines,  are  products  created  by 
his  work  :  in  other  words  by  an  intelligent  effort. 

In  this  case  does  man  really  create?  No  living  being 
has  the  power  to  add  or  to  subtract  a  single  atom  from 
existing  matter  nor  one  single  particle  from  the  world's 
physical  force.  But  man  produces,  that  is,  by  his  labor, 
makes  such  a  disposition  of  matter  as  to  serve  his  ends  and 
to  satisfy  his  needs,  and  in  such  fashion  that  what  was  use- 
less or  even  injurious  to  him  becomes  useful.  Accord- 
ingly, although  man  does  not  create  the  substance  of 
things,  he  creates  utility  which  renders  them  capable  of 
satisfying  a  need,  and  which,  consequently,  gives  them  a 
value. 

In  the  same  way,  when  we  eat  bread  we  do  not  destroy 
the  matter  of  which  the  bread  is  composed,  but  we  con- 
sume the  utility  of  the  bread,  that  is,  the  property  pos- 
sessed by  flour,  when  baked  with  water,  yeast  and  salt,  to 
furnish  a  substantial  food.  When  we  wear  a  hat  we  con- 
sume the  utility  of  the  hat  which  consists  in  being  a  con- 
venient or  shapely  covering  for  the  head ;  when  the  hat  be- 


12  Elements  of  Political  Economy 

comes  old  it  loses  its  utility  little  by  little  until  we  end  by 
throwing  it  aside.  When  we  cultivate  a  field,  we  con- 
sume the  utility  of  the  field ;  in  other  words,  the  vegetative 
force  of  the  earth  which  produces  crops.  Although  the 
field  still  exists,  the  utility  which  it  is  possible  to  draw 
from  it  in  the  form  of  a  crop  is  impaired,  though  each  year 
there  is  a  new  utility  because  each  year  the  productive 
force  of  the  field  is  renewed  by  the  action  of  nature  and  by 
the  farmer's  care. 

All  material  objects  which  possess  the  quality  of  being 
useful  constitute  wealth.  The  wealth  of  a  nation  is  the 
sum  of  all  the  useful  things  the  nation  possesses. 

In  common  parlance,  we  call  a  man  rich  when  he  has 
abundant  possessions.  In  economic  language  there  is  no 
man  so  poor  but  that  he  possesses  and  consumes  wealth. 
The  beggar's  rags  are  wealth,  and  the  coarse  food  by 
which  he  is  nourished  is  likewise  wealth. 

Natural  wealth  is  that  which  nature  itself  furnishes. 
A  country  whose  soil  is  fertile  and  where  mines  are  found 
is  richer  than  a  country  whose  soil  is  not  fertile  and  which 
contains  no  useful  minerals. 

Commercial  wealth  is  that  which  man  creates  by  his 
industry  (i.  e.,  by  his  economic  activity) ,  or  that  to  which 
he  has  given  utility  by  appropriating  it  to  his  needs.  As 
natural  wealth  is  transformed  into  commercial  wealth  the 
moment  it  is  appropriated  by  man  and  exploited  by  his 
labor,  the  latter,  commercial  wealth,  constitutes  in  reality 
the  whole  of  wealth  which  can  be  bought  and  sold,  and 
which,  consequently,  figures  in  the  national  fortune. 

Wealth  comprises  on  the  one  hand,  land,  which  by  vir- 
tue of  its  soil,  its  raw  materials  and  the  forces  of  nature 
of  which  man  has  availed  himself,  constitutes  an  instru- 
ment of  production ;  it  comprises  on  the  other  hand  the 


Introduction  1 3 

products  which  are  the  result  of  human  industry,  such  as 
the  wheat  stacked  in  the  field,  or  the  finished  locomotive 
in  the  shop,  and  which  may  be  employed  either  as  objects 
to  be  consumed  for  the  satisfaction  of  personal  needs  or  as 
instruments  of  further  production. 

8.  The  Productive  Forces. — The  economic  potenti- 
ality of  an  individual  or  of  a  nation  is  not  made  up  solely 
of  material  objects.  Compare,  for  example,  the  career  of 
two  young  men,  one  of  whom  has  received  a  legacy  of  ele- 
gant manners  and  some  money,  but  who  is  stupid  and  lazy, 
the  other  of  whom  has  received  solid  instruction  and  is 
energetic  and  intelligent;  the  chances  are  that  the  latter, 
thanks  to  his  labor,  will  create  wealth,  and  at  the  end  of  a 
few  years  will  possess  more  than  the  former. 

In  reality  the  productive  forces  are  the  sources  of 
wealth.     They  are  of  two  kinds  : 

1.  The  forces  of  nature,  which  being  closely  identi- 
fied with  matter,  may  be  classed  as  natural  wealth  when 
they  are  nobody's  property,  and  as  commercial  wealth 
when  they  have  been  appropriated ; 

2.  The  productive  force  of  man  as  it  manifests  itself 
in  his  work  and  intelligence,  and  which  is  above  all  things 
the  efficient  cause  of  wealth ;  it  is  man,  who  by  his  activity, 
makes  use  of  the  forces  of  nature  and  of  natural  and  com- 
mercial wealth  in  order  to  create  new  wealth. 

The  economic  potentiality  of  a  nation  is  accordingly  its 
wealth  and  productive  forces.  The  latter  preponderates 
over  the  former  as  the  field  preponderates  over  the  wheat 
harvested  from  it,  as  the  orchard  over  the  apples  gathered 
in  it,  as  the  artist  over  the  picture  he  has  painted. 

9.  Definition  of  Certain  Other  Terms. — We  shall 
have  occasion  further  on  to  refer  to  most  of  the  definitions 
given  in  this  introduction  by  way  of  preliminary  concep- 


14  Elements  of  Political  Economy 

tions ;  they  are  necessary  to  a  proper  comprehension  of  the 
subject  we  are  about  to  treat.  There  still  remain  a  few 
terms  whose  meaning  it  is  useful  to  know  before  entering 
upon  the  subject  proper. 

Labor  is  the  application  of  the  productive  force  of  man 
to  the  creation  of  some  utility. 

The  useful  resultant  of  labor  is  not  always  a  product, 
i.  e.,  a  material  object;  it  may  consist  of  a  service.  The 
doctor  renders  a  service  to  the  invalid  by  prescribing  a 
regime  and  remedies  to  cure  him ;  a  servant  renders  a  serv- 
ice to  her  employers  when  she  cleans  their  clothes  or  pre- 
pares their  dinner. 

One  may  weld  these  two  terms,  production  and  service, 
into  one  general  definition.  When  man  creates  for  his 
own  use  a  product  which  is  useful  he  renders  a  service  to 
himself;  when  he  sells  to  another  a  product  which  he  has 
created  he  renders  a  service  to  that  other  and  receives  from 
him  in  return  an  equivalent  service  in  the  shape  of  a  pay- 
ment for  his  merchandise.  We  are  thus  justified  in  say- 
ing that  every  creation  of  a  utility,  either  in  the  form  of  a 
material  product,  or  of  a  personal  service  is  in  reality  a 
service,  and  that  all  economic  activity  has  for  its  object  the 
production  and  exchange  of  services. 

Industry  is  the  application  of  human  activity  to  the 
production  and  circulation  of  wealth. 

Exchange  is  the  act  by  which  a  man  sells  to  another  a 
product  or  a  personal  service  for  an  equivalent  product  or 
service. 

The  value  of  a  product  is  the  quantity  of  merchandise 
which  one  gives  in  order  to  obtain  that  product  in  ex- 
change.    The  price  is  the  value  expressed  in  money. 

Resume 

Political  economy  is  the  science  of  wealth,  in  other 


Introduction  15 

words,  a  moral  science  which  has  for  its  object  a  study 
of  the  natural  laws  under  which  man  in  the  social  state 
produces,  exchanges  and  consumes  wealth. 

Political  economy  is  a  science  of  observation.  Statis- 
tics is  its  auxiliary. 

There  are  three  phases  of  wealth  and  four  main  di- 
visions of  political  economy:  ist.  phase:  production  and 
distribution;  2nd.  phase :  exchange;  3rd.  phase :  consump- 
tion. 

There  are  three  terms  in  the  economic  movement,  two 
extreme  terms,  economic  needs,  which  torment,  and  satis- 
faction, which  appeases,  and  the  middle  term,  effort,  which 
procures  the  satisfaction. 

Man,  by  production,  creates  neither  matter  nor  force, 
he  creates  utility.  Utility  is  the  quality  which  renders 
things  fit  to  satisfy  a  need. 

Wealth  consists  of  all  material  objects  having  utility, 
and  is  distinguished  as  natural  wealth  and  commercial 
wealth. 

The  productive  forces,  the  forces  of  nature  and  forces 
of  man,  are  the  sources  of  wealth. 

Labor  is  the  application  of  the  productive  force  of  man 
to  the  creation  of  some  utility.  The  result  of  this  effort 
may  be  either  a  service  or  a  product. — At  bottom  all  eco- 
nomic activity  has  for  its  object  the  production  and  ex- 
change of  services. 


PART  I 

PRODUCTION  OF  WEALTH 

PRODUCTION  AND  ITS  CONDITIONS 

10.  Sources  of  Production,     ii.  General   Conditions  of   Produc- 
tion. 

10.  Sources  of  Production.  —  The  production  of 
wealth  demands  the  cooperation  of  several  elements.  For 
his  work  the  laborer  employs  raw  materials  and  tools,  and 
brings  into  play  the  forces  of  nature;  thus  the  farmer 
requires  land  to  raise  crops. 

Land,  raw  material,  and  the  physical  forces  belong  to 
the  domain  of  nature.  Labor  is  the  immediate  result  of 
human  activity.  The  tool,  the  material,  and  the  land  that 
has  been  taken  up,  owe  their  existence  at  the  same  time  to 
nature  which  has  furnished  the  substance,  and  to  man  who 
has  created  or  augmented  their  utility  by  his  labor;  they 
constitute  a  peculiar  element  of  mixed  origin  which  we 
call  capital. 

Man  and  nature  are  thus  primary  sources  in  the  pro- 
duction of  all  commercial  wealth. 

11.  General  Conditions  of  Production.  —  We  may 
likewise  say  that  by  comparison  man  and  nature  are  the 
two  poles  of  production :  nature,  the  inexhaustible  reser- 
voir of  the  physical  forces  and  of  matter,  is  in  a  fashion  the 
negative  pole ;  man,  an  active  and  intelligent  being,  is  the 
positive  pole;  for  it  is  he  who  wills  and  acts  and  directs  his 
activity  either  toward  himself,  to  conserve  and  develop  his 

i6 


Production  of  Wealth  ly 

productive  powers,  or  for  the  benefit  of  his  fellows  to 
whom  he  renders  a  service,  or  again,  upon  nature,  whose 
forces  and  materials  he  employs. 

Man  makes  a  double  contribution  to  production :  by 
his  work  and  by  his  capital.  Capital  is  of  mixed  origin ; 
it  is  formed  of  products  saved  up,  that  is,  not  consumed ; 
it  is  in  a  fashion  human  labor  embodied  in  material  and 
preserved  to  us  by  saving. 

We  might  likewise  define  industrial  production  as  fol- 
lows : 

Man,  by  his  labor,  i.  e.,  muscular  and  intellectual  effort, 
and  by  the  aid  of  his  capital  (i.  e.,  the  aid  of  products  of 
labor  saved  up)  invests  matter  with  utility  by  the  employ- 
ment of  physical  forces;  in  other  words,  man  utilizes 
nature. 

The  creation  of  utilities  that  consist  of  services  may  in 
turn  be  thus  defined  : 

Man  renders  himself  useful  to  man  by  his  labor. 

We  may  merge  the  definition  of  material  production 
and  of  services  into  a  more  concise  formula,  but  it  will  be 
dangerous  to  base  any  reasoning  upon  it  unless  we  bear 
in  mind  at  all  times  that  labor  here  implies  two  distinct 
elements  signifying  at  the  same  time  labor  properly  so 
called  and  capital.  Such  a  definition  would  be  as  fol- 
lows : 

Production  is  labor  (labor  and  capital)  creating  a 
utility. 

All  labor  is  not  necessarily  production,  since  to  produce 
does  not  mean  simply  to  give  one's  self  up  to  barren  ef- 
fort, but  involves  the  creation  of  a  utility.  The  result 
alone  decides  the  question.  Whilst  at  work  man  consumes 
products:  ist,  his  sustenance  and  personal  maintenance; 
2nd,  raw  materials  and  the  tools  he  uses.     Consequently. 

2 


i8  Elements  of  Political  Economy 

he  destroys  utility  and  he  has  really  produced  nothing-,  un- 
less, everything  taken  into  account,  the  sum  of  the  utilities 
created  is  greater  than  the  sum  of  the  utilities  destroyed. 

Under  this  hypothesis  what  is  it  he  has  produced? 
Precisely  the  excess  of  utility  created  over  utility  con- 
sumed. Utility  created  is  called  the  gross  product;  the 
excess  referred  to  is  called  the  net  product.  But  if  the 
utility  created  is  less  than  the  utility  consumed,  there  is 
loss  of  wealth  and  impoverishment.  For  example:  ist 
supposition  :  A  man  working  on  his  own  account,  or  for 
another,  consumes  more  than  he  produces.  In  the  final 
analysis  this  man  cannot  be  reckoned  as  a  producer ;  he 
diminishes  his  own  wealth  or  that  of  his  employer,  though 
he  is  generally  classed  as  such.  2nd  supposition :  he  pro- 
duces a  sum  of  utilities  exactly  equivalent  to  that  he  con- 
sumes. There  is  here  a  transmutation  but  no  increase  of 
wealth.  This  transmutation  is  nevertheless  significant 
because  it  counts  in  the  gross  product,  resulting  either  in 
an  increase  of  population  or  greater  well-being.  3rd  sup- 
position :  he  produces  more  than  he  consumes.  Here  we 
have  a  net  product  which,  if  saved,  increases  the  national 
wealth. 

The  failure  to  realize  a  net  product  may  be  due  to  the 
inefficiency  of  the  workman,  resulting  in  waste  of  time 
and  material,  or  to  bad  management  on  the  part  of  the  em- 
ployer who  has  selected  poor  material  or  directed  the  pro- 
duction of  something  unmarketable. 

We  propose  to  take  up  in  the  following  order  the  three 
elements  of  production  :  nature,  labor,  capital. 

Resume 

Products.  Man,  by  his  labor,  and  his  intelligence,  and 
by  the  aid  of  his  capital,  i.  e.,  the  products  of  labor  saved 


Production  of  Wealth  19 

up,  invests  matter  with  utility  by  employing  the  physical 
forces. 

Sources.  Man,  the  active  principal,  and  nature,  the 
passive  principal. 

The  three  elements  of  production  are:  labor,  capital, 
nature  (land  and  the  physical  forces  not  appropriated). 

Production  is  labor  (labor  and  capital)  creating  utility. 

II.     NATURE 

12.  Nature  and  Natural  Agents.     13.  Land. 

12.  Nature  and  Natural  Agents. — Nature  embraces 
all  the  matter  and  all  the  force  which  the  world  contains ; 
it  is  the  grand  reservoir  whence  man  draws  the  elements 
of  production.  It  furnishes  him  matter  such  as  air, 
water,  land,  plants  and  animals,  and  furnishes  the  forces 
inherent  in  that  matter,  such  as  heat,  electricity,  wind, 
river  currents,  vegetative  power,  muscular  energy,  and 
even  the  intelligence  of  animals. 

In  some  instances  nature  furnishes  man  with  this 
matter  and  these  forces  in  unlimited  or  almost  unlimited 
quantity;  instance  the  air  we  breathe,  the  waters  of  the 
ocean,  and  even  the  water  of  rivers  for  those  who  have 
access  to  it.  In  other  instances,  as  in  the  case  of  diamonds 
or  land  itself,  it  supplies  this  matter  and  these  forces  in 
limited  quantity.  This  distinction  is  important  because  it 
gives  rise  to  quite  distinct  economic  phenomena. 

However,  these  elements,  this  matter,  or  these  forces, 
unlimited  or  limited  in  quantity,  do  not  at  first  present 
themselves  in  such  combination  that  man  can  derive  the 
greatest  utility  from  them.  In  the  language  of  the  Bible, 
"in  the  sweat  of  thy  face  shalt  thou  eat  bread."  In  coun- 
tries of  which   man  has  not  yet  taken  possession,   and 


20  Elements  of  Political  Economy 

where  nature  reigns  supreme,  the  most  fertile  lands  no 
doubt  become  covered,  in  the  course  of  the  centuries  with 
magnificent  forests,  but  it  is  almost  impossible  to  penetrate 
them  except  with  the  aid  of  an  ax,  and  the  great  carnivora 
and  venomous  reptiles  reign  supreme  in  them.  In  valleys 
where  alluvial  soil  has  accumulated,  the  rivers  overrun 
their  banks  and  pestilential  swamps  cover  soil  which  might 
otherwise  yield  rich  harvests.  Rivers  abound  in  fish,  but 
here  their  marshy  banks  are  inaccessible  and  mali- 
cious animals  render  the  approach  to  them  dangerous. 
Torrents  descend  from  the  heights  devastating  the  valleys. 
Mineral  wealth  is  hidden  in  the  bowels  of  the  earth  under 
various  disguises  and  combinations,  and  is  secreted  ordi- 
narily in  the  least  accessible  regions.  There  is  nothing 
more  wretched  nor  more  precarious  than  the  existence  of 
savage  peoples  who  rely  upon  nature  to  regulate  the  pro- 
duction of  their  means  of  subsistence. 

From  the  standpoint  of  political  economy  the  natural 
elements  of  production  divide  themselves  into  three 
classes : 

I.  The  forces  which  cannot  be  appropriated  for  the 
reason  that  they  are  not  found  embodied  in  any  one  por- 
tion of  matter,  and  are  in  unlimited  quantity,  such  as  air, 
light,  and  the  heat  of  the  sun.  They  do  not  acquire  value 
save  in  exceptional  cases  which  will  be  referred  to  later  on ; 
but  they  are  utilities  of  the  first  order,  such  as  the  air  we 
breathe ;  or  are  the  most  efficient  agents  in  certain  indus- 
tries, such  as  the  sunlight  in  photography.  Their  service 
is  gratuitious  since  one  procures  it  without  being  required 
to  buy  it.  Generally  speaking,  one  might  say  that  the 
forces  of  nature,  without  whose  cooperation  man  could 
produce  nothing,  are  not  themselves  capable  of  being  ap- 
propriated, but  that  most  of  them  are  nevertheless  appro- 


Production  of  Wealth  21 

priated  by  the  appropriation  of  matter  in  which  they  are 
inherent. 

2.  Matter  which  is  capable  of  being  appropriated,  but 
which  is  not  appropriated,  remaining  ordinarily  the  col- 
lective property  of  the  state.  Such  are  navigable  rivers, 
the  sea,  which  certain  maritime  nations  have  in  former 
times  sought  in  vain  to  appropriate,  but  which,  for  eco- 
nomic and  political  reasons,  is  nevertheless  considered  as 
state  property  along  the  coast. 

3.  In  an  advanced  civilization,  matter  which  is  appro- 
priated and  which  generally  takes  the  form  of  private 
property. 

The  two  latter  classes  of  property  are  most  frequently 
united  in  economic  language  under  the  name  of  land. 

The  forces  of  nature  are  of  such  importance  in  pro- 
duction that  the  formation  of  groups  of  population  and  the 
development  of  civilization  are  largely  conditioned  by 
them.  The  glacial  zones  are  almost  deserted.  The  torrid 
zone  is  inhabited,  but  the  continued  heat  and  the  exuber- 
ance of  vegetation  in  it  take  away  man's  energy  save  in 
certain  locations  favored  with  a  milder  climate.  It  is  in 
the  temperate  zone  that  the  great  civilizations  are  formed. 
When  we  take  up  the  history  of  the  principal  countries  of 
that  zone,  we  find  in  their  climate,  in  the  character  of  their 
soil  and  in  their  geographical  situation  some  explanation 
of  their  wealth  and  the  proof  of  the  intimate  connection 
that  exists  between  the  manner  and  the  degree  of  national 
economic  development  on  the  one  hand,  and  the  physical 
conditions  of  the  country  on  the  other. 

13,  Land. — The  expression  land,  in  its  economic 
sense,  includes : 

I.  The  sea,  which  belongs  to  the  whole  world  and 
which  serves  for  navigation  and  fishing,  as  well  as  that 


22  Elements  of  Political  Economy 

portion  of  the  sea  near  the  coast  which  has  been  appropri- 
ated, and  where  we  find  natural  fisheries  and  fish-culture, 
and  which  is  reserved  as  national  property  for  the  fisher- 
men of  the  nation; 

2.  Certain  bodies  of  fresh  water  which  are  public 
or  private  property,  and  which,  besides  supplying  water 
for  various  public  and  private  uses,  serve  for  navigation, 
fishing  and  motive  power; 

3.  Surface  of  the  land :  that  is  to  say,  land  properly 
so-called  which  serves  for  agriculture,  building  and  roads, 
as  well  as  the  depth  of  the  earth,  where  one  finds  quarries 
and  mines. 

Land  properly  so-called,  farming  land,  constitutes  by 
far  the  most  important  class. 

It  is  easy  to  understand  how  much  the  farmer  owes  to 
the  soil.  It  is  the  soil  that  is  tilled,  the  soil  in  which  the 
seed  sprouts,  the  soil  that  nourishes  and  brings  to  perfec- 
tion grain,  trees  and  fruits.  It  is  impossible  to  picture 
any  plant  cultivation,  no  matter  what  it  may  be,  of  which 
soil  does  not  constitute  the  basis.  The  flowers  we  culti- 
vate in  a  pot  on  the  window  sill  could  not  thrive  without 
soil  and  water,  which  latter  is  likewise  indispensable  to 
fertility,  and  is  embraced  in  the  economic  expression  land. 

It  is  land  which  likewise  sustains  animal  life,  since 
animals  live  either  on  vegetables  which  grow  on  dry  land 
or  in  water,  or  on  other  animals  which  themselves  live  on 
vegetables.  Without  fields,  grass  or  vegetables,  how 
could  we  maintain  cattle  and  procure  milk  and  meat? 
How  could  man  exist,  who  lives  almost  solely  on  veg- 
etables and  animals,  the  only  mineral  substance  of  which 
he  makes  use  ordinarily  in  his  food  being  salt? 

When  we  consider  the  subject  further  we  see  that  land 
likewise  furnishes  the  material  for  all  industries,  just  as 


Production  of  Wealth  23 

it  furnishes  all  the  products  of  agriculture.  Enter  a  great 
foundry.  What  is  it  that  has  supplied  the  site?  What 
has  furnished  the  material  for  the  construction  of  the 
building,  and  for  the  tools  and  machinery  with  which  the 
foundry  is  equipped?  Whence  has  been  drawn  the  raw 
material  which  is  employed  in  the  industry? 

Land  and  its  products  are  absolutely  necessary  to  all 
production.  It  is,  however,  important  to  distinguish 
products,  which  constitute  one  kind  of  capital,  from  land, 
which  constitutes  another  kind. 

Land  is  always  natural  wealth,  provided  it  is  possessed 
of  some  fertility  or  contains  useful  minerals ;  but  it  is  not 
always  capital,  for  we  have  seen  that  capital  signifies  an 
instrument  of  production.  Now  land  acquires  this  last 
quality  only  when  human  labor  has  exploited  it  with  the 
object  of  creating  wealth.  There  are  vast  regions  which 
are  not  exploited :  they  are  barren  of  inhabitants.  Al- 
though this  land  is  no  man's  property,  and  costs  nothing, 
few  men  are  tempted  to  settle  there  for  the  reason  that 
under  such  conditions  the  land  would  simply  furnish  an 
instrument  of  production,  and  one  not  sufficiently  prolific 
to  permit  the  worker  to  live;  he  would  die  of  hunger  in 
his  isolation. 

Nevertheless,  under  certain  conditions,  a  venturesome 
spirit  who  does  not  shrink  from  the  prospect  of  hard  work 
and  privations  through  a  period  of  years,  if  he  can  thereby 
create  a  capital,  may  find  it  advantageous  to  emigrate  to  a 
distant  country  to  take  up  unoccupied  land,  or  more  fre- 
quently purchase  it  at  a  low  price :  it  is  thus  that  colonies 
begin.  At  the  same  time,  we  must  not  forget  that  they 
succeed  only  by  virtue  of  hard  and  persevering  labor, 
which  in  the  end  converts  the  virgin  soil  into  capital. 

It  is  a  mistake  to  think  that  all  lands  when  thev  are 


24  Elements  of  Political  Economy 

appropriated  and  exploited  by  man  possess  the  quality  of 
capital  to  the  same  degree. 

Some  of  them  are  naturally  less  fertile,  others  very 
fertile ;  the  first  are  only  moderate  instruments  of  produc- 
tion, the  second  excellent  instruments  of  production. 
These  latter  have  a  greater  value  than  the  former  for  the 
same  reason  that  a  steamboat  is  worth  more  than  a  canoe, 
and  a  sewing  machine  more  than  a  needle,  namely,  because 
they  render  greater  service. 

Nevertheless,  the  importance  of  land  considered  as  an 
instrument  of  production  depends  less  upon  its  natural 
qualities  than  on  the  labor  by  which  man  has  learned  to 
render  it  fertile,  on  the  utility  which  he  has  known  how 
to  give  to  its  products,  and  on  the  use  he  can  make  of  the 
ground.  This  is  why  some  land  yields  50  bushels  of 
wheat  per  acre  whilst  other  land  yields  only  15  bushels. 
It  explains  why  the  market  gardener  secures  from  small 
plots  of  land  in  the  neighborhood  of  large  cities  a  return 
altogether  out  of  proportion  to  that  of  outlying  regions. 
It  explains  the  fact  that  desirable  building  sites  in  great 
cities  command  a  price  many  thousand  times  greater  than 
an  equal  area  in  the  country. 

As  land  is  all  appropriated  in  civilized  countries  it 
constitutes  what  is  termed  realty,  or  landed  property. 
Being  an  instrument  of  production  it  might  likewise  be 
designated  landed  capital;  these  words  embrace,  it  is  true, 
not  only  the  land  itself,  but  all  the  improvements  made 
and  the  buildings  erected  on  the  land. 

In  uncivilized  countries  land  is  natural  wealth  to  which 
man  contributes  nothing  by  labor ;  he  simply  gathers  the 
fruits  and  roots  that  grow  spontaneously  or  captures  the 
animals  that  live  there.     Land  cannot  be  considered  as 


Production  of  Wealth  25 

capital  there,  because  it  is  not  an  instrument  of  production, 
and  because  it  is  not  the  result  of  labor  saved  up. 

The  moment  man  turns  cattle  into  a  field  the  land 
becomes  an  instrument  of  production ;  nevertheless  it  has, 
but  vaguely  as  yet,  the  character  of  capital. 

When  he  fences  the  field,  tills  it,  sows  it,  and  weeds  it, 
it  is  evidently  capital,  because  it  has  become  an  instrument 
of  production  whose  yield  is  due  principally  to  the  amount 
of  labor  which  man  has  in  some  fashion  expended  upon  it. 
This  is  why  certain  economists  have  thought  that  there 
was  no  essential  difference  between  landed  capital  and 
other  forms  of  capital.  They  have  observed  that  in  some 
places  land  has  little  or  no  commercial  value,  that  no  one 
is  in  a  hurry  to  take  possession  of  the  vast  tracts  which 
still  remain  unappropriated  in  desert  or  savage  regions  of 
the  globe,  that  land  in  general  acquires  value  only  when 
man  has  worked  it  and  that  it  acquires  it  almost  in  propor- 
tion to  the  labor  expended  either  on  the  soil  itself  or  ex- 
pended in  the  immediate  vicinity  in  such  manner  as  to 
communicate  utility  to  the  land  in  question.  Remarking 
these  facts,  they  have  deemed  it  sufficient  for  the  purposes 
of  political  economy  to  distinguish  between  two  elements 
of  production  as  having  a  right  to  remuneration,  namely, 
labor  and  capital,  which,  by  their  combined  action,  bring 
into  play  the  gratuitous  forces  of  nature. 

There  is  much  truth  in  this  theory,  but  the  conclusion 
is  overdrawn.  Appropriated  land  is  undoubtedly  capital, 
but  capital  of  a  special  kind.  It  is  necessary  to  distinguish 
it  by  scientific  analysis  from  other  kinds,  whilst  at  the 
same  time  bearing  in  mind  the  close  relationship  of  all 
kinds  of  capital. 

Circulating  capital  is  susceptible  of  indefinite  increase, 
and  consequently,  it  may  happen  that  in  this  field  prices 


26  Elements  of  Political  Economy 

may  fall  in  the  face  of  a  great  increase  in  consumption. 
Land,  or  landed  capital,  exists  only  in  limited  quantity  in 
each  country;  that  quantity  is  not  susceptible  of  increase, 
and  as  the  demand  for  land  increases  its  price  goes  up. 

Land  furnishes  directly,  in  the  form  of  vegetables  and 
minerals,  or  indirectly,  in  the  form  of  animals,  the  sub- 
stance of  all  products  of  human  industry.  Other  forms 
of  capital  are  but  products  created  from  this  substance; 
they  furnish  only  the  means  of  production. 

Circulating  capital  is  entirely  the  result  of  labor  and 
saving  or  of  the  overplus  of  wealth  already  created. 
Land  contains  in  itself  either  a  productive  power,  which 
is  inherent  in  it,  such  as  the  vegetative  force  which  varies 
considerably  in  different  soils  and  causes  a  great  dififert- 
ence  in  their  value,  or  it  contains  a  motive  force  such  as 
a  waterfall,  or  again,  it  may  contain  natural  wealth  which 
man  has  only  to  exploit,  such  as  the  forest  or  the  mine. 
This  power,  this  force  and  this  wealth  are  not  derived 
from  saving,  and  they  make  man's  labor  productive,  at 
the  same  time  that  they  are  made  productive  by  it. 

These  constitute  so  many  differences  which  distin- 
guish landed  capital  from  other  forms  of  capital. 

The  four  principal  economic  uses  for  land  are:  agri- 
culture, building  sites,  fisheries  and  mines.  Agriculture, 
which  is  the  principal  source  of  man's  nourishment,  is  the 
most  important. 

Resume 

In  the  work  of  production,  nature  furnishes :  ist. 
The  forces  which  are  not  susceptible  of  being  appropri- 
ated ;  2nd,  Matter  which,  although  susceptible  of  appro^ 
priation,  is  not  appropriated,  or  remains  ordinarily  the 
collective  property  of  the  state;  3rd,   Matter  which  is 


Production  of  Wealth  27 

appropriated,  and  which  in  an  advanced  civihzation,  gen- 
erally takes  the  form  of  private  property.  There  exists 
an  intimate  connection  between  the  method  and  the  degree 
of  national  economic  development  and  of  the  physical 
characteristics  of  the  country  which  the  nation  occupies. 

Land,  in  economic  language,  comprises  the  portion  of 
the  sea  appropriated,  bodies  of  fresh  water,  the  surface  of 
the  soil,  and  the  depth  of  the  earth.  This  constitutes 
landed  capital. 

Labor  and  capital,  bringing  into  play  the  gratuitous 
forces  of  nature,  are  the  two  elements  of  production ;  but 
it  is  necessary  to  bear  in  mind  that  land  is  a  distinct  kind 
of  capital;  it  exists  in  limited  quantity;  it  furnishes  the 
substance  of  all  the  products  of  human  industry;  it  con- 
tains within  itself  a  productive  power  and  motive  force 
and  natural  wealth  which  is  inherent  in  it. 

III.— LABOR 

14.  Labor.  15.  Physical  Labor  and  Manual  Labor.  16.  Intel- 
lectual Labor.  17.  Art  and  Science  in  Industry.  18.  The  Role 
of  Science  in  Production.  19.  Services  of  Intellect  Cheap  and 
often  Gratuitous.     20.  Intellectual  Capital. 

14.  Labor. — We  know  that  labor  is  the  application 
of  man's  productive  force  to  the  creation  of  some  utility, 
that  it  is  the  principal  source  of  production,  and  that 
nature  is  the  passive  instrument,  while  labor  is  the  active 
agent.  It  is  because  of  having  brought  out  clearly  this 
fundamental  truth  that  Adam  Smith  has  earned  the  title 
of  the  father  of  political  economy. 

Man  is  at  one  and  the  same  time  a  body  and  an  intelli- 
gence. When  he  is  at  work  his  body  is  in  motion,  and 
his  intelligence  directs  that  motion.  Accordingly  we  dis- 
tinguish two  kinds  of  labor  :  physical  labor  and  intellectual 
labor. 


28  Elements  of  Political  Economy 

In  reality,  all  work,  no  matter  what  it  may  be,  presup- 
poses a  cooperation  of  body  and  mind.  On  the  one  hand 
the  most  simple  physical  labor,  that  of  the  journeyman 
turning  a  crank,  cannot  be  performed  unless  the  brain 
issues  its  commands  to  the  muscles  of  the  arm,  and  regu- 
lates both  the  speed  and  direction  of  the  movement;  on 
the  other  hand,  the  teacher's  lesson,  or  the  writer's 
thought,  which  are  classed  amongst  the  most  intellectual 
occupations,  cannot  manifest  themselves  unless  the  mouth 
pronounces  the  words,  or  the  hand  guides  the  pen. 

Nevertheless,  the  distinction  referred  to  is  funda- 
mental ;  it  implies  a  preponderance  of  muscular  action  or 
of  intellectual  labor,  as  the  case  may  be. 

15.  Physical  Labor  and  Manual  Labor. — We  have 
said  that  no  matter  what  labor  man  pursues  he  is  obliged 
to  use  his  muscles.  We  might  add  that  no  matter  how 
much  he  is  aided  by  machinery  in  shaping  matter,  the 
motion  of  the  machinery  must  be  controlled  by  his  hands 
or  feet. 

Ordinarily  we  designate  as  manual  labor,  that  is  labor 
performed  by  the  hands,  all  work  in  which  muscular 
action  is  the  predominant  factor.  Now  there  is  no  indus- 
trial product  which  does  not  call  for  more  or  less  muscular 
action ;  manual  labor  is,  therefore,  one  of  the  essential 
factors  in  production. 

Under  the  head  of  distribution  we  shall  speak  of  how 
manual  labor  is  paid ;  it  will  suffice  here  to  consider  how 
it  operates.  It  may  be  performed  by  different  sorts  of 
people,  either  by  artisans  working  for  their  own  account, 
or  by  operatives  in  the  employ  of  others. 

It  may  be  more  or  less  effective,  according  to  the  chan- 
nel into  which  it  is  directed  or  the  tools  with  which  it  is 
equipped.     Nevertheless  the  question  of  the  faculty  for 


Production  of  Wealth  29 

work  inherent  in  man  is  distinct  from  the  question  of 
tools;  the  question  of  management  and  tools  we  propose 
to  take  up  later  on. 

The  effectiveness  of  labor  in  itself  depends  principally 
on  the  following  qualities  in  the  laborer,  namely,  muscular 
force,  intelligence  and  professional  morality. 

The  first  condition  is  physical.  Sex  and  age  often 
make  a  great  difference  in  this  particular  in  individuals. 
This  is  why  the  labor  of  women  and  that  of  children  com- 
mands less  as  a  rule  than  the  labor  of  men.  Race  likewise 
exercises  a  marked  influence.  Thus  it  has  been  observed 
that  the  construction  of  roadbeds  of  railways  in  India 
costs  as  much  as  in  England,  although  the  Hindoo  work- 
man receives  4>^d.  to  6d.  per  day,  whilst  the  English 
workman  earns  ten  times  that  much;  the  phenomenon  is 
explained  by  the  greater  effectiveness  of  English  over 
Hindoo  labor.  Climatic  conditions,  such  as  heat, 
humidity  and  miasma,  and  economic  conditions,  such  as 
food  and  well-being,  exercise  a  marked  influence  in  in- 
creasing or  lessening  the  energies  of  a  people.  Again, 
among  a  number  of  persons  of  the  same  age  and  the  same 
sex  and  living  under  the  same  conditions,  there  are  differ- 
ences of  vigor  which  have  an  influence  on  the  quantity  of 
work  produced. 

Nevertheless,  there  is  a  limit  to  these  differences;  it 
is  the  limit  of  physical  strength  which  in  the  most  vigorous 
man  is  seldom  double  or  triple  that  of  the  ordinary  man. 

Intellectual  and  moral  qualities  on  the  other  hand  are 
the  cause  of  much  greater  differences  in  men  than  any 
physical  qualities  can  possibly  be.  A  people  who  enjoy 
good  wages,  who  take  the  right  nourishment,  establish  a 
proper  standard  of  living,  and  contract  habits  of  accumu- 
lating property,  are  capable  of  much  more  effective  work 


30  Elements  of  Political  Economy 

than  a  people  who  are  wretched.  Individuals  who  have 
learned  their  trade  by  a  serious  apprenticeship  and  by  long 
experience,  those  who  have  their  intelligence  developed 
by  general  as  well  as  professional  instruction,  those  to 
whose  organs  nature  and  practice  have  given  a  special 
dexterity,  necessarily  have  more  skill  and  their  work  is 
more  productive. 

Strength  and  intelligence  are  not  the  only  things 
needed  for  work :  it  is  necessary  likewise  to  have  the  will 
to  work  and  to  have  control  over  one's  self.  The  trifler 
whilst  at  work  often  permits  his  attention  to  be  distracted ; 
the  idler  who  prefers  pleasure  to  gainful  occupations  and 
loafs  one  or  more  days  each  week  has  not  performed  his 
quota  of  work  at  the  end  of  the  week.  On  the  other  hand, 
the  man  who  has  the  proper  sense  of  duty,  who  conscien^ 
tiously  employs  his  time  at  the  shop  and  is  always  there,  is 
a  workman  who  surely  renders  more  service  than  the 
trifler  or  the  idler. 

The  social  environment  in  which  workmen  live  exer- 
cises an  important  influence  on  their  moral  character.  If 
they  are  surrounded  by  the  idle  and  the  lazy,  the  weaker 
among  them  (and  they  are  ordinarily  the  more  numer- 
ous) end  by  acquiring  bad  habits.  If,  on  the  other  hand, 
there  exists  a  strict  discipline  in  the  industries  of  the 
country,  if  the  working  people  are  themselves  alive  to 
their  obligations  to  work  and  to  be  steady,  the  children 
acquire  the  right  bent  at  an  early  age  and  generally  pre- 
serve it.  This  is  seen  in  certain  industrial  centers  of  the 
United  States  where  the  young,  properly  brought  up,  and 
possessing  a  sense  of  personal  dignity,  are  found  at  work 
principally  in  the  textile  factories.  This  is  what  likewise 
frequently  takes  place  when  the  operatives  have  some  per- 
sonal interest  in  the  success  of  the  enterprise.     Piecework, 


Production  of  Wealth  31 

when  well  organized,  may  likewise  produce  effects  of  this 
kind.  An  English  economist  has  felt  justified  in  remark- 
ing, "Whenever  you  find  a  rich  country,  you  may  be  cer- 
tain there  exists  a  people  submissive  to  the  moral  laws 
and  obedient  to  the  promptings  of  duty." 

That  which  has  its  seat  within,  conscientiousness  and 
self-control  on  the  part  of  the  laborer,  has  a  far  more  direct 
and  powerful  influence  on  the  results  obtained  in  industry, 
with  respect  to  both  quality  and  quantity  of  product  than 
any  influence  upon  them  from  the  outside.  It  is  much 
more  effective  than  the  surveillance  of  taskmasters  and 
employers,  more  effective  than  any  rules  of  the  workshop, 
and  more  effective  even  than  promised  rewards  for  special 
activity.  What  we  call  the  conscience  of  the  workman 
may  be  considered  one  of  the  master  qualities  of  the  man, 
and  especially  of  the  salaried  employee. 

16.  Intellectual  Labor. — If  all  manual  labor  presup- 
poses certain  action  on  the  part  of  the  intelligence,  it  is 
only  by  muscular  action,  on  the  other  hand,  that  intel- 
lectual labor  can  manifest  itself  externally,  and  it  is  nec- 
essary that  it  should  so  manifest  itself  if  it  is  to  create  a 
product  or  render  a  service. 

In  order  to  determine  whether  work  is  intellectual,  we 
must  regard  not  only  the  question  of  degree,  but  the  ques- 
tion of  kind  as  well.  The  artisan  in  chiselling  a  statue 
may  display  skill  and  taste  worthy  of  an  artist,  neverthe- 
less he  performs  only  manual  labor.  The  artist  himself, 
although  he  has  shaped  with  his  own  hands  the  model 
used  by  the  founder  in  casting  the  bronze  and  by  the 
artisan  in  giving  the  finishing  touches  to  it  with  his  chisel, 
has  nevertheless  performed  labor  which  is  plainly  intel- 
lectual, for  the  reason  that  in  this  latter  case  the  element 


^2  Elements  of  Political  Economy 

of  art  preponderates  over  the  element  of  labor  performed 
by  the  hands. 

In  a  great  factory  the  engineer  who  is  charged  with 
the  care  of  the  machinery,  and  who,  by  his  observations 
and  his  calculations,  invents  a  new  arrangement  of  shafts 
and  pulleys  which  increases  the  power  of  the  machinery, 
or  economizes  fuel  or  power,  performs  intellectual  work 
which  is  very  profitable  to  us ;  manual  labor  enters  at  the 
moment  when  the  workman  begins  to  carry  out  the  en- 
gineer's plans.  The  employer  who  gives  his  attention  to 
iiis  correspondence  and  his  accounts,  who  regulates  his 
purchases  and  sales,  and  who  moves  about  his  shop  exer- 
cising a  supervision  over  foremen  and  workmen,  performs 
intellectual  labor  of  the  utmost  importance ;  it  is  upon  him 
principally  that  depends  the  success  or  failure  of  the  enter- 
prise. It  is  according  to  the  good  or  bad  management  of 
the  entrepreneur  that  the  sum  total  of  the  efforts  expended 
and  the  capital  paid  out  in  the  establishment  result  in  the 
creation  of  a  utility  or  in  a  loss. 

Artist,  engineer  and  employer  all  perform  intellectual 
labor. 

The  qualities  which  are  needed  in  manual  labor  are 
likewise  important  for  intellectual  labor ;  but  in  the  latter 
there  is  one  quality  which  incontestably  dominates  all 
others,  and  to  a  very  marked  degree — it  is  intelligence. 

The  part  which  intelligence  plays  in  the  work  of  pro- 
duction will  be  shown  later  on.  We  may  say  now,  how- 
ever, that  whilst  the  differences  in  men,  which  arise  from 
differences  in  physical  strength,  are  quite  limited,  and 
whilst  those  arising  from  differences  in  manual  skill  are 
likewise  limited,  though  not  to  the  same  extent,  the  dif- 
ference which  may  exist  between  two  individuals  in  the 
matter  of  intellectual  work  is  unlimited,  just  as  the  im- 


Production  of  Wealth  33 

provement  of  industry  through  the  instrumentahty  of 
science  is  unhmited.  The  principal  appHcations  of  intel- 
ligence to  production  are:  i.  With  respect  to  mat- 
ter :  to  discover  matter  or  forces  hitherto  unknown ;  to 
find  new  uses  for  matter  and  forces  already  known,  and 
thus  to  give  them  more  utility;  to  prevent  waste  of  mat- 
ter or  forces,  and  to  improve  tools. 

2.  With  respect  to  man  :  to  increase  the  skill  of  the 
individual  worker ;  to  direct  manual  labor  or  guide  it  into 
more  profitable  channels;  to  get  larger  results  from  the 
combined  forces  employed  in  production  by  a  better  divi- 
sion and  organization  of  labor. 

17.  Art  and  Science  in  Industry. — In  all  countries 
and  at  all  times,  human  industry  has  received  its  light 
from  above ;  intelligence  has  sent  down  its  warming  rays 
upon  manual  labor,  has  quickened  it  with  new  life; 
through  the  instrumentality  of  art  it  has  instilled  into  it 
the  sentiment  of  the  beautiful,  and  under  the  guise  of 
science,  pointed  out  to  it  how  to  produce  the  useful  with 
the  least  waste. 

Intelligence  has  not  been  able,  however,  to  cause  its 
beneficent  influence  to  be  felt  always  in  the  same  manner 
and  with  equal  power. 

Art  varies  with  the  times.  It  becomes  more  perfect 
and  refined,  or  it  may  degenerate  like  the  societies  of 
which  it  expresses  certain  tendencies  and  embodies  the 
spirit ;  in  its  efforts  to  translate  into  sensible  forms  the 
idea  of  the  beautiful  as  each  age  and  civilization  conceives 
it,  it  is  more  the  product  of  instinct,  or  at  least  more  spon- 
taneous than  science  which  calls  for  long  reflection  and 
an  accumulation  of  experiments.  This  is  why  antiquity, 
which  had  not  as  yet  accumulated  any  great  treasures  of 
science,  was  able  nevertheless  to  shed  such  lustre  in  the 

3 


34  Elements  of  Political  Economy 

realm  of  art,  and  to  bequeath  to  us  models  whose  purity 
and  simplicity  have  never  been  surpassed.  This  also  ex- 
plains why  industry  has  had  art  for  its  first  recognized 
master,  and  why  it  has  placed  itself  cheerfully  under  the 
dominion  of  art  from  the  earliest  times  down  to  our  day, 
building  its  houses,  fashioning  its  furniture  and  utensils 
conformably  to  the  types  which  architecture,  sculpture 
and  painting  have  suggested  for  its  imitation.  Industry 
has  thus  given  to  its  productions  an  imprint  of  particular 
distinction  at  epochs  when  art  itself  has  flourished  most, 
as  in  Greece  in  the  age  of  Pericles,  and  in  Italy  and  in 
France  during  the  Renaissance. 

The  feeling  or  taste  for  art  is  one  of  the  mediums 
through  which  intelligence  is  applied  to  labor,  and  the 
study  of  masterpieces  in  the  various  fields  of  art,  and  the 
practice  of  drawing,  develop  taste.  Every  nation  desir- 
ous of  preserving  and  giving  to  its  productions  the  im- 
print of  beauty  should  cultivate  and  perfect  this  taste 
with  the  greatest  care. 

Science  long  held  itself  aloof  from  labor,  because 
formerly  manual  labor  was  generally  looked  down  upon, 
because  the  laborer  had  little  education,  and  because 
science  itself  did  not  have  sufficient  grasp  of  the  secrets 
of  nature  to  lay  down  practical  rules  for  industry. 

It  must  be  understood  that  we  are  here  speaking  of 
science  properly  so  called,  that  which  is  professed  by  the 
scientist  himself;  because,  if  we  include  under  the  name 
of  science  all  reasoned  knowledge  of  things,  we  might 
say  that  the  influence  of  science  has  made  itself  felt 
throughout  human  experience  since  all  tools  are  the  pro- 
duct of  scientific  thought.  It  was  in  fact  thought  of  this 
kind  which  taught  the  earliest  savage  to  fasten  with  a  fish 
bone  the  skin  of  the  wild  animal  with  which  he  covered  his 


Production  of  Wealth  35 

nakedness,  which  taught  the  lake-dweller  of  Switzerland 
and  mound-builder  of  America  to  drill  a  bone  in  order 
to  shape  a  needle,  and  which  taught  civilized  man  to  sub- 
stitute for  this  bone  a  slender  bit  of  steel.  The  sum  of 
this  knowledge  constituted  at  each  epoch  the  industrial 
art  of  that  epoch.  It  is  likewise  important  to  distinguish 
art  properly  so  called  from  industrial  art,  which  consists 
of  the  processes  employed  in  industry  and  is  derived  from 
science. 

It  was  in  the  eighteenth  century  that  science  properly 
so  called  was  first  applied  to  manufactures :  Watt  and 
Arkwright,  Scheele  and  Lavoisier  introduced  it.  The  of- 
fering of  the  former  two  was  machinery,  of  the  latter  two 
chemistry.  The  steam-engine,  by  substituting  for  the 
arm  of  the  workman  or  the  horse  gin,  a  force  that  was 
powerful  and  regular,  little  by  little  transformed  the  fac- 
tories, all  of  whose  machinery  has  been  made  to  conform 
to  mechanical  laws.  Chemistry  by  putting  the  elements 
of  bodies  at  the  disposition  of  industry,  has  contributed 
no  less  to  the  transformation  of  the  factory.  Mechanical 
and  chemical  action,  i.  e.,  movement  and  combination  of 
matter  are  accomplished  to-day  in  the  factory  with  the 
same  regularity  as  in  the  laboratory  of  the  scientist;  in- 
dustry, like  the  scientist,  possesses  the  reasoned  knowledge 
of  cause  and  effect. 

To-day  there  is  no  discovery  in  the  domain  of  theory 
that  does  not  almost  immediately  pass  into  the  domain  of 
practical  application,  that  is  not  tried  and  that  does  not 
soon  become,  if  it  proves  successful,  one  of  the  ordinary 
weapons  in  the  arsenal  of  industry.  Practice,  enriched 
by  speculative  thought,  furnishes  in  its  turn  to  the  latter 
an  immense  field  for  experiment,  crowds  questions  upon  it, 
and  compels  it  to  render  its  discoveries  more  definite  and 


36  Elements  of  Political  Economy 

complete.  Thus  there  establishes  itself  between  science 
and  industry  a  continuous  current  which  is  profitable  to 
both  :  this  is  one  of  the  results  of  the  methodical  study  of 
nature  and  one  of  the  characteristics  of  the  nineteenth 
century. 

18.  The  Role  of  Science  in  Production. — It  is  impor- 
tant to  bear  in  mind  that  the  muscles  of  men  serve  much 
less  to  directly  fashion  products  than  to  bring  into  play 
in  a  convenient  manner  the  forces  of  nature  which  really 
do  the  fashioning.  Ordinarily  it  is  the  tool  that  works : 
the  muscles,  brought  into  action  by  the  intelligence,  have 
but  to  direct  the  tool  and  obtain  an  effect  measured  by  the 
perfection  of  the  tool. 

Example :  The  child  who  casts  a  stone  from  his  hand 
himself  expends  a  force  equal  to  that  communicated  to  the 
projectile.  If  he  uses  a  sling,  the  centrifugal  force  of  the 
sling  performs  part  of  the  work.  If  he  takes  up  a  bow 
to  shoot  an  arrow,  the  elasticity  of  the  wood  performs  a 
greater  part.  If  he  uses  a  gun  to  discharge  a  bullet,  the 
expansive  force  of  the  gas  performs  a  still  greater  part  of 
the  work ;  with  little  effort,  consisting  simply  of  placing 
the  cartridge  and  pressing  the  trigger,  he  projects  a  mass 
of  lead  to  a  distance  and  with  a  speed  which  the  most 
violent  effort  of  the  strongest  man  could  never  have  ap- 
proximated. 

Another  example:  A  man  carries  on  his  back  in  a 
dorser,  which  is  in  itself  an  ingenious  product  of  man's 
intelligence  designed  to  aid  him  in  carrying  burdens, 
upwards  of  150  pounds  and  covers  a  distance  of  25  miles 
in  the  course  of  the  day.  The  same  man  by  the  aid  of  a 
wheelbarrow,  which  is  more  ingenious  than  a  dorser, 
easily  carries  250  pounds.  A  horse  equipped  with  a  pack- 
saddle  will  carry  500  pounds ;  harnessed  to  a  cart  he  will 


Production  of  Wealth  37 

draw  2,000  pounds.  To  attain  this  result,  however,  it 
was  necessary  that  man  should  first  domesticate  the  horse, 
that  he  should  invent  the  cart,  and  construct  roads  which 
facilitate  the  movement  of  vehicles,  so  many  acts  of  intel- 
ligence and  labor  each  of  which  represents  a  step  forward 
in  civilization.  These  are,  however,  as  nothing  in  com- 
parison with  the  locomotive,  which,  directed  by  two  per- 
sons, a  fireman  and  engineer,  can  draw  a  train  laden  with 
several  million  pounds  of  freight,  and  with  a  speed  many 
times  that  of  a  pedestrian.  A  few  men  thus  perform, 
thanks  to  the  invention  of  the  railroad,  a  task  which  an 
army  of  thousands  of  porters  could  not  accomplish,  for 
whilst  they  might  carry  this  burden  they  could  not  trans- 
port it  an  equal  distance  in  one  day. 

The  more  perfect  tools  become,  the  more  in  general 
does  ilie  muscular  action  of  the  laborer  tend  to  diminish, 
and  the  greater  is  the  intellectual  action  called  into  play 
to  further  im.prove  them. 

Now  that  which  perfects  tools  is  science,  and  this  time 
we  mean  by  the  word  on  the  one  hand  the  industrial  art 
in  all  its  degrees  from  the  primitive  art  of  the  shoemaker 
who  conceived  the  idea  of  making  use  of  a  strap  called  a 
stirrup  to  keep  in  position  on  his  knee  the  shoe  on  which 
he  is  at  work  and  to  thus  secure  the  use  of  both  hands, 
down  to  the  electric  generator  supplying  light  and  power ; 
and  on  the  other  hand  pure  science,  from  the  science  of 
observation  practiced  by  the  chemist  who  discovers  in 
fennentation  the  secret  of  a  healing  power,  down  to  the 
science  of  the  mathematician  who  in  determining  methods 
of  calculation  brings  potent  aid  to  astronomy  and  conse- 
quently to  navigation.  All  industrial  inventions,  great 
and  small,  can  be  traced  back  to  pure  science,  which  has 


38  Elements  of  Political  Economy 

directly  or  indirectly  given  birth  to  them,  and  explains 
them. 

We  see  how  vast  is  this  domain  which  in  a  fashion  is 
civilization's  arsenal  and  how  great  is  the  role  which 
science  and  intelligence  play  in  production.  Man  can  do 
nothing  with  matter,  not  even  transport  a  block  of  stone, 
without  borrowing  from  this  arsenal  an  idea  and  a  tool. 

19.  The  Sources  of  Intelligence  Cheap  and  Often 
Gratuitous. — In  order  to  grasp  more  clearly  the  impor- 
tance of  the  services  rendered  by  the  intelligence  as  illus- 
trated by  the  cheapening  of  commodities,  we  are  com- 
pelled to  anticipate  somewhat  a  subject  we  propose  to 
treat  later  on  in  connection  with  distribution  and  prices. 

The  requisites  of  production  are  capital  and  labor; 
likewise  a  certain  amount  of  science  or  knowledge  which 
directs  labor  and  points  out  its  most  profitable  use.  Labor 
and  capital  must  always  be  rewarded,  and  so  much  the 
more  liberally  in  general  according  as  production  is  more 
abundant  This  is  not  true  of  this  third  element ;  science 
at  the  very  start  contributes  its  services  at  less  than  their 
value,  and  soon  bestows  them  gratuitously. 

Why  is  it  that  an  invention,  i.  e.,  a  new  creation  of 
science,  is  adopted  in  a  great  industry?  Manifestly  be- 
cause it  makes  it  possible  to  create  either  a  product  that 
is  new  or  to  fabricate  an  old  product  at  less  cost,  or  a 
superior  product  at  the  same  cost.  In  every  way  the 
adoption  of  the  invention  carries  with  it  a  diminution  of 
the  effort  required  to  attain  a  given  result.  Science  econ- 
omizes labor.  From  this  economy  there  at  once  results 
an  advantage  either  to  the  vendor  who  realizes  a  larger 
profit,  or  to  the  purchaser  who  acquires  the  object  at  a 
lower  price,  often  in  a  certain  measure  to  both  at  a  time. 


Production  of  Wealth  39 

However  this  may  be,  we  may  say  that  science  enables 
industry  to  produce  cheaply. 

We  have  remarked,  however,  that  often  the  services 
of  intelhg-ence  are  even  gratuitous. 

Capital  is  unceasingly  used  up  and  renewed,  and  in 
the  course  of  a  hundred  or  a  thousand  years,  as  the  case 
may  be,  we  must  pay  for  the  capital  thus  used  and 
replaced.  Probably  we  pay  less  for  it  the  more  abundant 
it  is ;  nevertheless  we  must  always  give  to  it  assurances  of 
sufficient  rem.uneration  in  order  to  induce  men  to  save  and 
thereby  create  capital.  Moreover,  a  highly  perfected  in- 
dustry employs  a  great  deal  of  capital  and  has  large  sums 
to  pay  out  as  interest. 

Labor  must  likewise  be  paid,  because  the  workman 
who  gives  his  time  and  his  energies  to  an  occupation  is 
under  the  constant  necessity  of  expending  something  on 
his  living.  It  may  be  affirmed  that  the  greater  the 
progress  of  industry  the  better  remuneration  does  labor 
receive.  We  may  congratulate  ourselves  on  this  ten- 
dency ;  a  more  widespread  well  being  is  precisely  one  of 
the  happiest  consequences  of  the  development  of  industry. 

Can  we  then  pay  all  the  factors  of  production  more 
and  still  have  a  cheaper  product?  This  question  was  a 
source  of  embarrassment  to  the  earlier  economists,  several 
declared  that  a  general  rise  of  wages  was  an  absurdity. 
Truly,  if  the  total  product  and  the  number  of  producers 
remain  constant,  how  is  it  possible  in  human  experience 
to  give  more  to  each,  more  interest  to  capital,  more  wages 
to  labor,  and  to  even  witness  an  increase  in  the  profits  of 
the  entrepreneur?  If  the  precious  metals  become  too 
abundant  and  lose  half  their  value  it  would  no  doubt  be 
possible  to  give  everybody  two  dollars  in  place  of  one,  but 


40  Elements  of  Political  Economy 

each  dollar  would  only  purchase  one-half  as  much  as 
formerly  :  this  would  not  be  a  solution  of  the  problem. 

The  supposition  recalls  one  of  the  cases  which  Sancho- 
Panza  had  to  pass  judgment  upon  as  governor  of  the 
island  of  Barataria.  A  mistrustful  peasant  who  had 
given  to  his  tailor  a  quantity  of  cloth  sufficient  to  make 
a  hood  wished  to  ascertain  whether  the  tailor  was  not 
inclined  to  deceive  him  and  keep  part  of  the  cloth.  He 
accordingly  asked  him  whether  he  could  not  make  two 
hoods  with  the  same  amount  of  cloth.  "Oh,  yes,  I  can," 
responded  the  tailor.  The  peasant,  astonished  at  his  reply 
and  still  mistrustful,  asked  whether  he  could  not  make 
three.  "Yes";  and  at  length  five?  "Yes,  yes."  Some 
days  later  the  tailor,  having  used  all  the  cloth  conscien- 
tiously, presented  to  him  five  little  hoods  suitable  for  a 
doll. 

It  is  evident  that  so  long  as  the  total  product  remains 
the  same,  we  cannot  augment  the  number  of  parts  without 
making  each  smaller. 

What  the  earlier  economists  did  not  see  was  that  in 
industry  the  total  product  is  not  invariable ;  the  stuff  in^- 
creases.  The  stuff  is  the  national  wealth,  and  there  is  no 
room  for  doubt  that  this  wealth  has  greatly  increased  in 
modern  communities  during  the  past  century,  increased 
much  more  than  the  number  of  participants.  This  is  true 
of  such  countries  as  France,  where  there  has  been  great 
industrial  progress  with  only  a  slight  increase  of  the  pop- 
ulation, of  England  and  Germany,  where  there  has  been 
a  large  increase  of  population,  accompanied  by  an  even 
larger  development  of  industry,  and  of  the  United  States, 
where  the  progress  of  the  national  wealth  has  greatly  out- 
stripped a  truly  phenomenal  growth  of  population. 

It  is  to  intelligence  and  to  the  gratuitous  service  it 


Production  of  Wealth  41 

renders  that  this  progress  is  in  large  measure  due.  We 
no  longer  pay  for  the  intelligence  expended  fifty  years 
ago,  although  it  is  a  most  potent  collaborator. 

Fifty  years  hence  the  world  will  no  longer  pay  for  the 
intelligence  expended  to-day.  It  will  long  since  have 
fallen  into  the  public  domain,  and  will  continue  to  assist 
gratuitously  in  the  work  of  our  grandchildren  as  the  ex- 
penditure of  intelligence  on  the  part  of  our  fathers  now 
assists  in  ours. 

It  is  thus  when  we  make  use  of  a  crowbar,  paying 
simply  for  the  iron  it  contains  and  the  labor  of  the  work- 
man who  has  made  it,  and  without  being  compelled  to  pay 
anything  to  the  inventor,  whoever  he  may  have  been. 

What  would  you  think  of  a  machinist  who,  com.puting 
the  power  of  his  machine,  should  say :  "It  will  perform 
for  you  the  work  of  100  horses,  it  is  proper  that  I  ask  you 
100  times  the  price  of  a  draught  horse  for  it."  You 
would  laugh  at  him,  and  go  to  a  neighboring  machinist 
who,  making  a  more  reasonable  calculation  than  his  com- 
petitor, would  say,  "My  machine  has  cost  me  so  much  in 
materials  and  so  much  in  wages,  I  add  so  much  for  general 
expenses  and  as  my  own  profit ;  the  total  is  the  price  at 
which  I  will  let  you  have  the  machine."  You  buy  this 
machine  from  the  latter  and  profit  by  the  original  idea  of 
employing  steam  as  a  motive  force  without  being  com- 
pelled to  pay  for  the  idea.  Nothing  is  more  legitimate 
than  this  course,  for  the  reason  that  this  idea  has  fallen 
into  the  public  domain,  and  the  machinist  has  himself 
used  it  gratuitously  in  constructing  the  machine. 

Thus  the  factor  we  call  intelligence  differs  from  the 
two  other  factors  in  production  in  that  it  tends  to  furnish 
its  cooperation  gratuitously  and  without  the  intrinsic 
value  of  the  service  it  renders  beine  therebv  lessened. 


42  Elements  of  Political  Economy 

The  following  example  will  perhaps  serve  to  demon- 
strate this  more  clearly :  Suppose  a  calico  factory  which 
formerly  employed  a  small  number  of  artisans  at  hand- 
w^ork,  to  have  been  changed  into  a  great  establishment 
using  steam  and  a  large  number  of  mechanics.  In  the 
latter,  which  calls  for  the  use  of  much  more  capital,  not 
only  to  establish  the  factory,  but  as  working  capital,  the 
production  has  greatly  increased.  It  is  precisely  these 
new  tools  placed  by  science  at  the  disposition  of  the 
worker  which  permits  him  to  produce  more  in  a  given 
time  at  less  cost,  and  even  compels  him  to  produce  more. 
It  is  this  that  has  effected  the  saving  realized.  It  is  in  a 
fashion  the  key  to  the  mystery  and  furnishes  the  explana- 
tion of  the  economic  paradox  which  follows. 

Granted  that  the  selling  price  of  a  product  is  com- 
posed of  the  wages  of  the  laborer,  of  the  cost  of  raw 
materials,  of  the  interest  on  capital,  and  the  entrepre- 
neur's profit,  it  is  possible,  thanks  to  science,  to  create  a 
cheaper  product  out  of  more  expensive  materials,  paying 
higher  wages  and  higher  interest  on  capital,  and  to  finally 
have  left  over  a  larger  profit  for  the  entrepreneur. 

At  first  glance  this  apparent  paradox  would  seem  to 
prove  that  the  more  we  add,  the  smaller  the  sum  total, 
that  which  would  be  an  arithmetical  contradiction. 

On  reflection,  however,  it  will  be  seen  that  there  is  no 
contradiction,  that  the  paradox  is  explained  by  the  increase 
in  the  product,  which  gives  more  to  divide,  and  that  what 
we  have  stated  is  simply  an  economic  law.  It  is, 
moreover,  a  law  of  harmony  and  of  progress,  a  law 
calculated  to  dissipate  certain  fears  of  a  clash  of  interests 
between  the  industrial  classes  and  the  fear  of  impoverish- 
ment of  the  masses  conceived  by  certain  economists  at  the 
beginning  of  the  nineteenth  century. 


Production  of  Wealth  43 

Independently  of  the  general  law  there  is  an  accessory 
phenomenon  which  merits  attention :  the  value  of  the 
product  diminishing  at  the  same  time  that  wages  increase; 
the  workman  thus  derives  a  double  benefit  through  the 
progress  of  science :  he  sells  his  labor  dearer  and  buys 
certain  merchandise  cheaper. 

20.  Intellectual  Capital. — The  whole  mass  of  scientific 
knowledge,  industrial  inventions,  processes,  and  even  im- 
proved ways  of  doing  things  in  the  factory,  which 
transmit  themselves  from  generation  to  generation  and 
increase  constantly  in  a  civilized  community,  constitute 
an  immense  reservoir  of  productive  forces.  This  is 
assuredly  one  of  the  most  precious  possessions  of  civiliza- 
tion, and  as  we  shall  see,  one  of  the  most  efficient  causes 
of  the  multiplication  and  cheapening  of  products;  it  is 
what  constitutes  intellectual  capital. 

There  is  another  kind  of  capital  which  we  shall  discuss 
in  the  following  chapter :  it  is  material  capital,  that  for 
which  we  ordinarily  reserve  the  expression,  capital. 

In  reality  the  social  capital  of  man  is  composed  of  a 
materia]  and  an  intellectual  fund,  i.  e.,  the  sum  of  material 
capital,  and  of  the  whole  of  man's  useful  ideas  and  intelli- 
gence. It  is  on  this  double  foundation  that  civilization 
reposes.  Both  are  precious :  the  duty  of  each  generation 
is  to  preserve  them  both,  to  increase  them,  and  to  transmit 
them  augmented  to  the  following  generation. 

The  intellectual  fund  is  the  more  valuable  of  the  two, 
because  it  is  the  more  prolific  source  of  wealth,  because  it 
scatters  its  benefits  with  a  more  liberal  hand,  and  because 
it  is  the  one  whose  loss  is  repaired  with  the  greatest  diffi- 
culty. When  a  hostile  army  has  ravaged  the  territory  of 
a  civilized  nation,  the  nation  returns  to  its  work  after  the 
retreat  of  the  destroyer,  and  a  few  years  sometimes  suffice 


44  Elements  of  Political  Economy 

to  erase  every  material  trace  of  his  passage:  France 
experienced  this  in  1814,  1815  and  in  1870.  But  when 
the  barbarian  comes  and  casts  his  grim  shadow  over  a 
fair  land,  as  was  witnessed  in  the  fifth  century  at  the  epoch 
of  the  Germanic  invasion,  centuries  may  be  required  to 
pull  the  country  out  of  its  condition  of  misery  and  to 
cause  the  light  of  intelligence  to  shine  in  it  anew. 

The  writings  of  scientists  and  of  the  learned,  and 
consequently  our  libraries,  are  reservoirs  of  intellectual 
capital.  Such  capital  is  transmitted  by  reading  and  by 
instruction.  Scientists  and  inventors  add  to  it ;  it  enriches 
itself  by  discoveries  in  the  field  of  theory  as  well  as  by  the 
practical  improvements  which  the  incessant  activity  of  the 
human  mind  produces.  Teachers  and  useful  publications 
of  every  kind,  conversation,  apprenticeship  and  the 
counsels  of  experienced  men  contribute  in  different  ways 
to  its  spread.  From  the  point  of  view  of  industrial  pro- 
duction it  functions  through  the  instrumentality  of  all 
those  who  have  received  instruction  and  who  work. 
With  the  facility  for  communication  and  the  multiplicity 
of  international  relations  existing  to-day  discoveries  can- 
not long  remain  the  secret  of  any  one  man,  or  the  privi- 
leged possession  of  any  one  nation,  but  circulate  and 
enter  promptly  into  the  general  domain  of  humanity.^ 

Resume 

Muscular  labor  differs  according  to  the  age,  sex,  race 
and  vigor  of  the  individual,  and  still  more  according  to 
his  or  her  intellectual  qualities  (skill,  etc.)  and  moral 
qualities  (steadiness,  etc.).  Intellectual  labor  has  a  pro- 
ductive power  which  is  much  greater  than  that  of  mus- 
cular labor  and  which  is  practically  unlimited. 

*  See  Chapter  V,  questions  relating  to  the  organization  of  labor. 


Production  of  Wealth  45 

Art  and  science  are  the  two  great  leaders  of  industry. 

The  more  tools  are  perfected  by  science,  the  more  in 
general  does  the  muscular  action  of  the  laborer  tend  to 
diminish  and  intellectual  action  tend  to  increase.  Science 
at  the  very  start  contributes  its  services  at  less  than  their 
value  and  soon  bestows  them  gratuitously. 

Economic  Paradox:  Granted  that  the  selling  price 
of  a  product  is  composed  of  the  wages  of  the  laborer,  of 
the  cost  of  raw  materials,  of  the  interest  on  capital  and 
the  entrepreneur's  profit,  it  is  possible,  thanks  to  science, 
to  create  a  cheaper  product  out  of  more  expensive  mate- 
rials, paying  higher  wages  and  higher  interest  on  capital 
and  to  finally  have  left  over  a  larger  profit  for  the  entre- 
preneur. 

Intellectual  capital  is  thus  one  of  the  most  precious 
possessions  of  humanity  and  one  of  the  most  efficient 
causes  of  the  multiplication  and  cheapening  of  products. 

IV.— CAPITAL 

21.  Saving.  22.  Capital  and  the  Fund  for  Consumption.  23. 
Renewal  of  Capital.  24.  Importance  of  Capital  to  Production.  25. 
The  Role  of  Capital  in  Relation  to  Labor.  26.  Productive  and 
Unproductive  Capital.  27.  Fixed  Capital.  28.  Machinery.  29.  In- 
fluence of  Machinery  on  the  Intellectual  Condition  of  the  Laborer. 
30.  Machinery  and  the  Displacement  of  Labor.  31.  Circulating  Cap- 
ital. 

21.  Saving. — Labor  is  the  first  element  in  produc- 
tion. It  is  not  the  sole  element,  since  civilized  man  in  all 
his  undertakings,  and  the  savage  in  nearly  all,  are  aided 
by  tools,  and  employ  materials  prepared  in  various  ways 
which  invariably  represent  previous  labor  and  wealth 
already  created.  Accordingly  wealth  thus  employed  is 
likewise  an  element  of  production  :  it  is  capital,  and  capital 
has  its  principal  source  in  saving. 


46  Elements  of  Political  Economy 

We  have  remarked  that  poHtical  economy  is  a  moral 
science,  finding  its  principles  of  action  in  the  quaUties 
inherent  in  the  moral  nature  of  man.  We  discovered  at 
the  outset  an  activity  of  body  and  mind  which  creates 
wealth.  We  now  encounter  a  second  quality  equally  in- 
dispensable, vi2.:  foresight  giving  rise  to  saving  which 
may  be  defined  as  the  practice  of  thrift,  the  careful  man- 
agement of  expenditures  and  husbanding  of  resources,  the 
act  of  preserving  and  amassing  wealth. 

To  save  is  to  refrain  from  expending  all  the  products 
of  one's  labor,  or  all  one's  revenue  for  the  satisfaction  of 
immediate  personal  needs;  he  who  reserves  nothing  is 
improvident.  The  man  who  has  capital,  and  not  only 
consumes  such  revenue  as  is  derived  from  it,  but  goes 
further  and  consumes  for  his  personal  needs  a  part  of  the 
capital  itself,  is  killing  the  hen  that  lays  the  golden  egg. 
Such  a  man  is  more  than  improvident :  he  is  prodigal. 

To  take  a  simple  example  of  the  influence  of  saving, 
let  us  consider  the  case  of  two  men  on  an  island,  the  one 
fishing,  the  other  hunting,  and  both  exchanging  a  part  of 
their  products  in  order  to  secure  variety  of  food.  Sup- 
pose the  fisherman  has  the  virtue  of  foresight  which  the 
hunter  lacks. 

Each  day  the  hunter  consumes  the  whole  of  the  game 
he  has  killed  or  the  fish  he  has  secured  by  exchange, 
whether  much  or  little.  The  months  roll  by  without  any 
amelioration  in  his  condition,  without  providing  any 
security  against  the  horrors  of  starvation  should  sickness 
overtake  him  or  persistent  bad  luck  follow  him.  It  is 
thus  that  average  people  often  act,  and  it  is  one  of  the 
reasons  why  they  stagnate  in  a  condition  of  profound 
wretchedness. 

Suppose  that  the  fisherman,  on  the  other  hand,  estab- 


Production  of  Wealth  47 

lishes  a  practice  of  dividing  into  two  portions  his  fish  or 
the  game  bought  with  fish.  Each  day  he  consumes  one 
portion  to  nourish  himself.  By  abstinence  he  manages 
to  save  another  portion,  large  or  small,  as  the  case  may  be, 
which  he  salts  or  smokes.  This  supply  first  of  all  assures 
him  of  a  subsistence  should  the  fish  happen  to  be  lacking 
for  a  period,  and  in  the  next  place,  permits  him  to  occupy 
whole  days  in  making  better  nets  or  constructing  a  cabin. 
He  accumulates  material  resources,  such  as  the  net,  which 
is  calculated  to  be  serviceable  for  a  long  time,  and  the 
cabin,  which  will  shelter  its  owner  for  the  rest  of  his  days. 
This  man  soon  rises  to  a  position  quite  superior  to  that 
of  the  hunter ;  he  becomes  relatively  rich,  and  it  is  to  his 
economy  that  he  owes  this  advantage.  Not  only  can  he 
now  enjoy  more  of  the  conveniences  of  life,  but  having 
more  and  better  tools,  the  results  of  his  day's  efforts  are 
henceforth  much  more  lucrative  than  those  of  the  hunter. 

This  is  simply  a  representation  of  facts  which  repeat 
themselves  constantly  in  man's  social  state  in  greater 
diversity. 

The  two  cardinal  virtues  of  political  economy  are 
labor  and  saving,  which  one  may  call  respectively  the 
creator  and  preserver  of  wealth. 

From  this  point  of  view  there  are  four  possible  eco- 
nomic states : 

1.  A  man  who  posesssed  neither  of  these  virtues,  and 
no  capital  profitably  employed  by  a  producer  so  that  he 
may  live  on  the  income,  and  had  no  family  to  care  for 
him  in  his  infirmity  and  old  age.  would  be,  from  an 
economic  standpoint,  a  useless  being,  one  might  say  a 
harmful  being,  since  his  existence  could  only  serve  to 
diminish  the  mass  of  social  wealth. 

2.  A  man  who  possessed  the  virtue  of  labor  and  not 


48  El  cm  cuts  of  Political  Economy 

that  of  saving  would  be  condemned,  so  to  speak,  to  roll 
the  rock  of  Sisyphus,  i.  e.,  to  continually  commence  his 
task  anew  without  making  any  advance;  nevertheless, 
thanks  to  the  mechanism  of  exchange,  a  portion  of  the 
fruits  of  his  toil  might  be  saved  by  others  and  benefit 
society  in  this  way. 

3.  A  man  who  occupied  himself  solely  in  maintaining 
at  their  original  level  the  savings  previously  made  by  him 
or  his  family,  would  be  useful  to  society  by  reason  of  this 
very  fact,  which  assures  to  it  the  continued  enjoyment  of 
a  certain  capital. 

4.  Under  the  ordinary  conditions  of  economic  life 
the  man  who  is  most  useful  to  himself  and  fellows  is  he 
who  unites  in  himself  the  double  virtue  of  producing  a 
great  deal  and  consuming  less  than  he  produces ;  the  man 
who  works  and  saves.  Every  one  ought  to  qualify  him- 
self at  an  early  age  to  become  one  of  such  men  by  contract- 
ing habits  of  industry  and  economy. 

This  quality  which  is  desirable  for  the  individual  is 
quite  indispensable  for  society  as  a  whole;  every  society 
which  fails  to  unite  in  itself  the  virtues  of  industry  and 
economy  is  inevitably  condemned  to  merely  vegetate  and 
even  to  disappear  in  time. 

22.  Capital  and  the  Fund  Destined  for  Consump- 
tion.— Saving  is  but  the  first  term  in  a  complex  evolution ; 
it  represents  abstinence,  the  sacrifice  of  present  enjoyment 
for  future  benefit ;  but  it  is  not  in  itself  a  benefit.  A  miser 
who,  throughout  a  long  existence,  piles  up  in  his  strong 
box  piece  upon  piece  of  money,  does  not  further  his  own 
well-being  by  these  successive  accumulations,  and  for  the 
time-being  deprives  society  of  the  wealth  which  is  thus 
withdrawn  from  circulation.  Saving  once  made  may  be 
employed  in  production,  taking  the  form  of  instruction. 


Production  of  Wealth  49 

tools,  raw  materials,  wages  and  instruments  of  production, 
the  object  being  to  develop  men,  to  aid  them  in  their  labor 
or  to  pay  for  labor :  this  is  what  is  called  capitalizing  in 
its  most  liberal  sense. 

However,  the  expression  capital,  when  unqualified,  is 
ordinarily  reserved  by  economists  to  designate  material 
capital  and  should  be  so  reserved  in  order  to  avoid  confu- 
sion. Sums  expended  for  instruction  do  not  belong  to 
this  category,  because  they  are  devoted  to  the  increase  of 
intellectual  capital,  which  has  its  proper  place  in  the 
category  of  productive  forces. 

Not  all  saving  is  immediately  capitalized.  In  such  a 
matter  every  one  must  judge  for  himself  of  the  oppor- 
tunity; political  economy  limits  itself  to  laying  down  the 
principle  that  it  is  well  that  the  largest  possible  proportion 
of  savings  should  be  capitalized,  and  this  as  promptly  as 
possible. 

In  ordinary  language  the  word  capital  is  used  to 
designate  all  kinds  of  wealth.  Economic  language  does 
not  give  it  this  wide  and  vague  meaning;  it  is  best  to 
designate  distinct  things  by  distinct  expressions. 

Accordingly,  not  all  wealth  is  of  necessity  either 
capital,  nor  destined  to  become  such.  The  income  of 
stockholders  is  not  capital.  Wages,  although  paid  by 
capital,  are  no  longer  capital  when  they  become  the  prop- 
erty of  the  laborer  and  are  expended  by  him  for  his  sup- 
port. There  is  thus  a  large  proportion  of  the  national 
income  which  forms  a  fund  destined  for  consumption,  i.  e., 
a  portion  of  wealth  expended  for  personal  sustenance  and 
for  luxuries. 

One  may  easily  conceive  a  sum  passing  from  the 
category  of  capital  into  that  of  consumption.  Thus  when 
an  employer  takes  money  from  his  till  to  pay  his  work- 

4 


50  Elements  of  Political  Economy 

men,  it  is  capital  he  is  parting  with ;  but  when  the  work- 
man pays  out  this  same  money  to  his  baker,  he  is  drawing 
it  from  his  consumption  fund. 

In  certain  relatively  rare  cases,  capital  may  not  be  the 
product  of  human  labor,  but  may  have  other  origin.  This 
is  what  happens  when,  by  the  right  of  accession,  a  strip  of 
new  land  washed  up  by  the  water  is  added  to  the  property 
of  a  riparian  owner ;  or,  again,  when  the  first  occupant  of 
a  hitherto  uninhabited  country  cultivates  a  field. 

For  the  creation  of  capital  three  conditions  are 
required : 

1.  A  product  or  a  material  thing  appropriated  by 
man; 

2.  The  saving  of  some  of  that  product ; 

3.  Its  employment  with  a  view  to  production,  or  to 
use  a  common  term,  with  a  view  to  reproduction,  since 
capital  is  itself  a  product,  and  is  consumed  in  order  to 
reproduce  new  wealth. 

The  first  two  conditions  are  indispensable :  on  them 
depends  the  abundance  or  scarcity  of  capital.  If  we 
produce  but  little,  it  is  quite  impossible  to  have  any  great 
amount  of  capital.  On  the  other  hand,  if,  whilst  pro- 
ducing a  great  deal,  we  save  but  little,  it  is  still  impossible 
to  have  much  capital,  since  production,  consumption, 
saving  and  capital  are  phenomena  closely  allied. 

The  total  capital  of  a  nation  is  composed  of  all  the 
saving  hitherto  accumulated,  which  is  not  yet  destroyed 
by  use  or  time,  and  is  either  being  utilized  or  is  at  the 
present  moment  in  a  condition  to  be  utilized.  When  the 
body  social  is  in  a  healthy  condition,  i.  e.,  when  society 
is  not  under  the  shadow  of  a  passing  crisis  or  in  a  state 
of  decay,  there  is  added  each  year  to  this  total  of  existing 
capital,  preserved  and  renewed,  the  sum  of  the  capital 


Production  of  Wealth  51 

newly  formed  during  the  year.  This  last  is  derived  from 
the  year's  savings,  which  are  equivalent  to  the  excess  of 
production  over  consumption.  If  we  have  both  pro- 
duced and  consumed  a  great  deal  the  excess  may  be  insig- 
nificant. If  we  have  saved  a  great  deal  whilst  producing 
a  great  deal  the  excess  will  be  considerable. 

It  may  happen  that  we  save  nothing  whatever  and 
consume  more  than  was  produced  in  the  course  of  the 
year.  In  this  case  the  body  social  is  not  in  a  healthy  con- 
dition, and  in  order  to  exist  the  nation  is  obliged  to  con- 
sume a  portion  of  the  capital  that  has  been  previously 
accumulated. 

,23.  Renewal  of  Capital. — The  third  condition,  the 
employment  of  capital,  is  that  which  essentially  charac- 
terizes capital.  We  know  that  all  saving,  whether  in  the 
form  of  a  product  or  money,  becomes  capital  by  the  very 
act  of  being  applied  to  production.  It  may  be  so  applied 
under  very  different  forms.  Nevertheless  all  capital  has 
a  com.mon  trait,  it  is  that  of  being  an  advance  or  loan  to 
production.  Consequently,  it  has  a  just  claim  to  be 
recuperated  from  the  products  it  helps  to  create,  recu- 
perated either  at  once  and  in  its  totality,  or  little  by  little 
and  in  installments. 

When  we  speak  of  accumulated  capital,  w^e  must  not 
picture  it  to  ourselves  as  a  board  of  riches  heaped  up  and 
carefully  set  aside,  safe  against  all  danger  of  destruction 
and  enlarged  each  year  by  new  accessions  as  if  it  were  an 
Egyptian  pyramid,  to  which  each  generation  should  add 
a  layer  of  stone.  Whether  old  or  new,  capital  is  always 
in  motion,  and  that  by  reason  of  its  very  nature,  because 
saved  up  wealth  becomes  capital  only  in  so  far  as  it  is 
actively  employed  in  reproduction.  Capital  can  be  pro- 
ductive only  on  condition  of  being  consumed. 


52  Elements  of  Political  Economy 

What  proportion  of  the  capital  we  possess  to-day  has 
come  down  to  us  from  the  previous  century?  Little,  in- 
deed, if  we  except  the  great  monuments  which  remain  for 
ages,  and  works  of  public  utility,  such  as  jetties,  harbors, 
roads,  and  certain  constructions  which  likewise  date  back 
a  long  time,  but  which  are  in  a  serviceable  condition  only 
because  of  frequent  repairs,  i.  e.,  because  of  fresh  capital 
contributed  by  each  generation.  The  capital  of  the  pre- 
vious generation  has  been  consumed  in  order  to  create 
products  which,  becoming  capital  in  their  turn,  have 
themselves  been  consumed  in  the  process  of  giving  birth 
to  new  products.  There  is  thus  a  process  of  perpetual 
renewal,  an  endless  chain.  A  steam  engine  is  capital. 
How  has  it  been  built?  By  the  aid  of  capital  which  was 
used  to  pay  wages,  and  to  buy  iron  and  other  materials. 
This  very  capital  so  used,  whence  was  it  derived?  Per- 
haps from  a  farmer  who  had  collected  it  by  savings 
realized  from  time  to  time  from  his  crops  and  who  loaned 
it  to  the  machinist.  How  did  the  farmer  manage  to  save 
anything  on  his  crops  ?  Undoubtedly  by  reason  of  being 
industrious  and  vigilant,  but  likewise  because  he  had  good 
implements  bought  with  capital  his  fathers  had  bequeathed 
to  him,  and  because  his  lands  had  been  rendered  salubrious 
and  improved  by  the  labors  of  previous  generations,  i.  e., 
the  farmer  was  able  to  make  his  savings  by  the  aid  of 
capital  incorporated  in  the  soil. 

The  wheat  harvested  in  the  United  States  amounts  to 
several  hundred  million  bushels.  Is  this  a  pure  creation 
from  nothing,  the  result  solely  of  a  year's  work  on  the  part 
of  the  American  farmer?  Certainly  not.  This  wheat  is 
in  existence  only  because  there  existed  previously  a  capital, 
and  because  part  of  this  capital  was  consumed  in  fertilizers, 
in  seed,  in  the  food  and  pay  of  the  farm  laborer,  in  imple- 


Production  of  Wealth  53 

ments,  machinery  and  beasts  of  burden.  The  capital  had 
itself  been  formed  more  or  less  recently  by  the  transforma- 
tion of  capital  previously  existing.  We  may  say  the  same 
of  all  the  products  of  agriculture  and  industry  in  every 
country. 

"If  existing  capital,"  says  John  Stuart  Mill,  "is  trans- 
mitted from  year  to  year,  and  from  age  to  age,  it  is  not 
by  preservation  but  by  its  perpetual  renewal.  The 
growth  of  capital  is  like  the  growth  of  population.  Every 
individual,  who  is  born,  dies,  but  in  a  given  period  the 
number  that  are  born  exceeds  the  number  that  die." 

24.  Importance  of  Capital  in  Production. — The  im- 
portant role  played  by  capital  in  production  is  the  more 
easily  comprehended  the  richer  the  community  in  which 
the  observer  lives. 

A  savage  who  has  only  his  bow,  tires  himself  out  in 
following,  or  stalking,  for  an  entire  day  a  bison  which  he 
perhaps  never  secures.  A  farmer  in  a  civilized  country 
has  on  his  estate  numerous  cattle  which  he  can  either 
slaughter  or  sell  to  the  butcher.  What  is  it  that  enables 
the  latter  to  possess  rich  pastures,  a  store  of  fodder,  and 
buildings  in  which  to  shelter  his  cattle  and  fatten  them? 
A  fisherman  with  only  his  net,  no  matter  what  his 
skill,  makes  a  much  smaller  catch  than  the  proprietor  who 
opens  the  sluice-gate  of  his  pond,  empties  the  pond  and 
fills  his  basket  to  overflowing  with  fish  which  have  been 
allowed  to  multiply  for  several  years.  What  is  it  that  has 
enabled  this  proprietor  to  devote  a  portion  of  his  land  to 
this  purpose,  to  carry  out  the  necessary  work  of  construc- 
tion, to  place  the  first  fish  in  the  pond  and  await  the 
result  ? 

Consider  the  case  of  the  weaver  ofif  in  the  country  who 
lacks  the  means  to  procure  implements  other  than  the 


54  Elements  of  Political  Economy 

wooden  loom  placed  in  his  cottage  close  by  his  bed.  A 
manufacturer  in  the  same  valley  has  in  his  establish- 
ment a  hundred  looms  propelled  by  water-power.  In  the 
course  of  the  month  the  former  finds  it  difficult  to  turn 
out  three  pieces  of  cloth  of  thirty  yards  each,  and  earns 
a  bare  living,  while  the  manufacturer  with  his  machines, 
which  operate  with  greater  regularity  and  speed,  may  con- 
tent himself  with  half  the  profit  and  still  succeed  in  accu- 
mulating a  fortune.  What  is  it  that  enabled  him  to  erect 
the  mill  with  its  big  water  wheels,  and  extensive  machin- 
ery, and  metal  instead  of  wooden  looms?  What  is  it 
that  has  allowed  him  to  buy  in  advance  the  considerable 
stock  of  yarn,  to  pay  out  so  much  to  labor,  and  to  carry 
in  his  warehouse  for  months  awaiting  a  market  so  many 
pieces  of  cloth  ? 

The  beneficial  role  of  capital  is  not  limited  to  the  fac- 
tory. 

In  the  great  centers  to  what  do  we  owe  the  varied 
stocks  of  products  of  all  kinds  capable  of  satisfying  all 
tastes  and  fancies?  Surely  to  capital,  which  enabled  the 
merchant  to  store  them  and  wait  for  his  return.  To 
what  do  we  owe  the  facilities  for  communication  which 
the  railway  has  given  us,  and  of  which  preceding  genera- 
tions had  no  knowledge?  Undoubtedly,  first  of  all,  to 
science,  but  we  owe  them  to  capital  too  because  it  has  per- 
mitted science  to  realize  its  plans  and  has  levelled  the 
route,  constructed  viaducts,  pierced  the  hills  and  laid 
metal  rails  at  a  great  outlay.  To  what  do  we  owe  the 
multitude  of  buildings  which  go  to  make  up  our  cities? 
To  do  what  we  owe  our  streets,  sewers,  roads,  and  all  the 
monuments  of  civilization  which  are  the  common  property 
of  the  community? 

Let  us  penetrate  still  farther  into  a  portion  of  that 


Production  of  Wealth  55 

vast  domain  which  is  often  overlooked  because  it  fails  to 
present  itself  to  our  gaze  in  a  material  form.  What  is  it 
that  has  conferred  upon  civilized  man  that  great  produc- 
tive power  we  all  admire  and  enjoy,  and  which  is  the  very- 
thing  that  offers  a  profitable  employment  to  material  cap- 
ital ?  We  have  already  said  that  it  is  science  which  does 
this;  but  science  is  not  an  entity  endowed  with  an  inde- 
pendent existence;  it  exists  through  man  and  in  man. 
It  is  because  there  is  such  a  thing  as  instruction  amongst 
men  that  science  is  created,  preserved  and  developed. 
Every  day  a  large  amount  of  capital  is  expended  on  the 
living  generation,  principally  on  the  growing  generation, 
in  the  form  of  teaching,  apprenticeship  and  study.  This 
results  in  maintaining  society  at  the  level  of  knowledge 
previously  attained,  and  in  raising  this  level.  Accord- 
ingly, it  is  still  to  capital  that  is  due  the  development  of 
man  as  well  as  the  creation  of  the  instruments  of  produc- 
tion. Nevertheless  it  is  not  our  intention  to  introduce 
this  subject  at  greater  length  here  since  it  is  more  properly 
treated  in  the  chapter  on  labor,  under  the  name  of  intel- 
lectual capital ;  but  what  it  is  well  to  note  here  is  that  the 
formation  of  intellectual  capital  entails  a  considerable 
expenditure  of  material  capital. 

25.  The  Role  of  Capital  in  relation  to  Labor. — An 
artisan  could  not  live  on  the  things  on  which  he  is  at 
work  at  the  moment  because,  as  a  rule,  his  labor  has  not 
yet  turned  them  into  consumable  products.  Manifestly 
the  blacksmith  or  shoemaker,  whilst  fashioning  the  bar 
of  iron  or  shoe,  must  maintain  himself  by  the  aid  of 
former  products — i.  e.,  by  the  aid  of  capital.  The  same 
is  true  of  the  baker  or  farmer :  it  is  not  the  bread  he  is 
kneading  at  the  moment,  nor  the  wheat  he  is  harvesting 
which  nourishes  him.     Between  the  artisan  working-  on 


56  Elements  of  Political  Economy 

his  own  account,  and  the  laborer  who  receives  wages, 
there  is  in  this  respect  no  fundamental  difference.  Both 
live  on  capital,  the  one  on  his  own  capital,  the  other  on 
the  wages  paid  out  of  his  employer's  capital. 

In  a  civilized  country  no  matter  what  industry  we 
inspect,  we  find  capital  in  more  or  less  abundance,  mak- 
ing labor  fruitful  and  paying  the  wages  of  labor.  All 
buildings,  all  tools,  all  raw  materials,  all  industrial  plants, 
all  wages  form  a  part  of  capital. 

Without  capital,  man  is  virtually  naked  on  the  earth ; 
he  has  naught  but  his  hands  and  feet  with  which  to  attack 
and  subdue  nature  to  his  needs.  The  cultivator's  hoe  and 
the  seamstress's  needle  are  capital.  What  feeble  cap- 
ital, it  is  true,  in  comparison  with  the  great  factories  of 
to-day,  in  which  simple  tools  are  replaced  by  gigantic 
machines  which  perform  the  heaviest  and  most  unpleasant 
part  of  the  task,  multiplying  a  thousandfold  the  laborer's 
efficiency,  and  often  requiring  of  him  simply  the  exercise 
of  intelligence  to  guide  some  natural  force!  It  follows 
from  all  this, 

I  St.  That  in  civilized  society  labor  can  accomplish 
nothing  without  capital,  and  capital  nothing  without  the 
aid  of  labor;  they  are  necessary  allies. 

2nd.  That  capital  feeds  labor,  since  it  supplies  wages 
and  supports  the  producer,  w^hilst  the  product  of  his  labor 
is  still  unfinished  and  incapable  of  being  exchanged  for 
objects  suitable  for  personal  consumption. 

3rd.  That  capital  controls  labor  by  reason  of  the 
fact  that  no  work  can  be  carried  out  in  the  actual  condi- 
tion of  existing  society  without  preexisting  capital. 

5th.  That  finally  the  undertakings  of  labor,  other 
things  being  equal,  are  limited  by  the  amount  of  capital 
available.     We  may  thus  conclude  by  saying :     The  more 


Production  of  Wealth  57" 

capital  there  is,  the  greater  are  the  opportunities  for  em- 
ployment. 

26.  Productive  and  Unproductive  Capital. — Al- 
though it  is  the  quahty  of  capital  to  be  employed  in  pro- 
duction, we  often  make  use  of  the  expressions,  productive 
and  unproductive  capital. 

In  reality,  when  saving  is  once  launched  in  industry, 
it  has  become  capital ;  but  capital  may  occasionally  cease  to 
function  without  losing  its  quality  provided  it  is  destined 
to  be  used  again  in  the  future. 

Examples :  A  factory  closes  for  repair  or  lack  of 
work.  The  building  and  machinery  do  not  cease  to  be 
capital,  but  for  the  moment  they  are  unproductive  capital. 
A  tradesman  is  carrying  a  considerable  sum  of  monev 
derived  from  the  sale  of  his  wares ;  he  refrains  from  using 
it  to  buy  new  material,  either  because  he  foresees  a  fall 
in  the  price  of  that  material,  or  because  he  fears  a  reduc- 
tion in  the  demand  for  his  products:  his  money  for  the 
moment  is  unproductive.  This  is  what  happens  during 
an  industrial  crisis.  The  capital  is  not  necessarily  de- 
stroyed ;  it  simply  ceases  to  be  employed  actively  because 
it  either  lacks  the  courage  or  the  opportunity  to  embark 
in  new  enterprises. 

It  is  important  to  distinguish  temporary  unproductive- 
ness from  the  actual  destruction  of  capital.  If  the  trades- 
man has  spent  in  festivities  and  revelry  the  sum  of  money 
he  was  carrying,  he  has  forever  deprived  his  business  and 
society  of  just  that  much  power  to  command  labor. 

27.  Fixed  Capital. — It  is  important  to  distingmsh 
between  fixed  capital  and  circulating  capital.  For  ex- 
ample, the  premises  a  printer  occupies,  if  he  own  them, 
are  part  of  his  fixed  capital.  If  he  be  but  a  tenant  and 
pay  the  rental  out  of  his  circulating  capital,  he  is  still 


58  Elements  of  Political  Economy 

subject  to  the  expense  of  installing  himself,  or  arranging 
the  premises  to  meet  the  special  needs  of  his  business,  and 
he  must,  of  course,  buy  the  proper  machinery  and  the 
furniture  of  his  trade.  This  cost  of  installation  and 
industrial  furniture  are  fixed  capital  which  can  only  be 
recovered  by  gradual  amortization. 

By  the  side  of  material  capital,  but  not  to  be  confused 
with  it,  we  find  the  intellectual  and  moral  capital  which 
does  not  figure  in  a  commercial  inventory,  but  which  is 
nevertheless  of  great  importance,  and  has  a  real  commer- 
cial value ;  of  such  are  the  tradesman's  talent,  the  reputa- 
tion of  the  establishment  which  results  from  such  talent, 
trademarks,  and  inventions  and  processes  of  which  the 
tradesman  has  the  exclusive  legal  enjoyment  by  reason 
of  a  patent,  or  because  he  has  preserved  its  secret. 

The  Hxed  capital  of  an  enterprise  accordingly  in- 
cludes : 

1st.  The  land  itself  and  the  improvements  thereon 
for  both  the  agriculturist  and  the  tradesman. 

2nd.  The  improvements  in  the  soil  itself  for  agricul- 
tural pursuits  and  mining  industries,  improvements  which 
may  be  distinguished  as  permanent,  such  as  drainage,  and 
as  temporary,  such  as  the  addition  of  elements  the  soil 
lacks. 

3rd.  The  cost  of  installation  and  industrial  furniture 
together  constituting  the  first  cost  of  establishing  the 
industry. 

4th.  Tools,  which  include  machines,  and,  for  the 
agriculturist,  the  livestock  of  the  farm. 

5th.     The  personal  equipment  of  the  entrepreneur. 

If  we  were  to  make  an  inventory  of  national  capital, 
it  would  be  necessary  to  further  include  all  means  of  com- 
munication, edifices  dedicated  to  the  public  service,  etc. 


Production  of  Wealth  59 

28.  Machinery. — Machines  constitute  an  important 
sub-division  of  tools.  In  our  day  they  form  one  of  the 
most  common  and  effective  channels  for  the  activity  of 
capital.  Properly  speaking,  they  are  nothing  more  than 
perfected  tools.  Nature  armed  man  simply  with  his  feet 
and  hands.  All  that  his  intelligence  had  enabled  him  to 
add,  from  the  simple  fishing  line  whose  hook  and  bait 
drop  to  the  bottom  of  the  water  to  entice  and  catch  the 
fish,  up  to  the  engine  which  supplies  the  motive  power 
to  all  the  machinery  of  a  great  factory,  or  the  telephone 
which  transmits  messages,  all  are  tools  or  machinery,  i.  e., 
passive  instruments  which  the  will  of  the  worker  sets  in 
motion. 

So  long  as  the  instrument  derives  its  motion  from  the 
hand  of  the  worker,  such  as  a  file,  saw,  hammer  or  pincers, 
we  call  it  a  tool.  When  the  worker  merely  directs  the  in- 
strument which  no  longer  gets  its  motion  entirely  from  his 
hand,  such  instrument  is  classed  as  a  machine. 

A  circular  saw,  which  is  impelled  by  steam,  and  at 
which  it  is  only  necessary  for  the  operator  to  shove  his 
plank,  is  a  machine;  whilst  the  handsaw  is  a  tool.  The 
oar  is  a  tool;  the  propeller  of  a  steamship  is  part  of  a 
machine.  To  some  instruments  which  partake  of  the 
character  of  both  tools  and  machines,  such,  for  example, 
as  the  sewing  machine,  we  have  given  the  name  of 
machine-tool.  What  is  important  is  to  comprehend 
clearly  that,  in  the  first  place,  for  the  fashioning  of  any 
product  whatever,  man  cannot  dispense  with  instruments, 
tools  or  machines,  and  that,  in  the  second  place,  the  more 
perfect  his  instruments,  the  greater  are  the  results  obtained 
by  a  given  effort.  In  order  to  realize  the  full  force  of  the 
second  assertion,  it  is  only  necessary  to  recall  what  has 


6o  Elements  of  Political  Economy 

already  been  said  regarding  the  cheap  and  gratuitous 
services  of  intelHgence  in  production. 

Machinery  suppHes  delicacy  and  precision  as  well  as 
power.  A  striking  example  is  the  machine  made  by  Row- 
land to  produce  gratings  used  in  determining  the  compo- 
sition of  the  stars  by  means  of  the  stellar  spectra;  the 
machine  rules  15,000  lines  to  the  inch. 

Machinery  observes  in  its  movements  a  certain  regu- 
larity which  handwork  never  attains,  and  which  forces 
the  workman  to  incessant  activity  and  attention.  Fur- 
thermore, by  calling  for  the  investment  of  a  large  capital, 
which  involves  considerable  loss  if  it  remains  unproduc- 
tive, it  frequently  induces  the  entrepreneur  to  continue 
work,  and  consequently,  to  afford  support  to  labor  even 
when  orders  are  lacking  or  the  operations  for  the  moment 
are  unprofitable.  We  may  now  sum  up  the  principal 
advantages  of  machinery  by  saying  that : 

1.  Machinery  economizes  labor,  and  renders  products 
cheap. 

2.  It  spares  the  workman  the  heavier  tasks  and 
makes  manual  labor  more  agreeable. 

3.  It  makes  production  more  rapid  and  abundant, 
and  consequently  increases  wealth. 

4.  It  augments  man's  power  over  nature  by  increas- 
ing his  strength,  and  by  endowing  him  with  qualities 
which  his  organs  alone  do  not  supply. 

5.  Up  to  a  certain  point  it  constitutes  a  safeguard 
against  stoppage  of  work. 

6.  It  serves  to  discipline  the  workman. 

7.  Finally  (that  which  settles  the  question,  if  such 
question  is  still  raised  amongst  serious  people,  of  the  influ- 
ence of  machinery  in  limiting  or  extending  the  oppor- 
tunities of  employment),  when  machinery  exists,  it  soon 


Production  of  Wealth  6i 

imposes  itself  as  a  necessity  because  competition  would 
not  permit  a  manufacturer  to  continue  very  long  with 
imperfect  tools  whilst  others  are  using  perfected  ones. 

It  is  proper  to  add  that  all  the  increase  of  production 
due  to  a  machine  is  not  a  clear  gain.  To  obtain  this  in- 
crease of  production,  it  is  necessary  to  use  a  more  costly 
machine:  in  other  words,  to  employ  more  capital.  The 
entrepreneur  must  make  his  calculation.  If  the  interest 
on  this  additional  capital  and  its  amortization  represent 
a  sum  greater  than  the  saving  in  wages,  the  new  machine 
will  not  be  performing  a  service.  If,  on  the  other  hand, 
a  saving  can  be  made,  the  machine  must  be  used. 

The  higher  the  wages  in  the  country,  the  more  induce- 
ment is  there  to  multiply  machinery. 

This  is  one  of  the  two  things  which  explains  the  ad- 
vent of  machinery  in  the  second  half  of  the  i8th  century. 

The  other  explanation  is  found  in  the  progress  of  the 
applied  sciences,  and  especially  in  the  invention  of  the 
steam  engine. 

2g.  Influence  of  Machinery  on  the  Intellectual  Con- 
dition of  the  Workman. — Machinery  disciplines  and  gives 
character  to  the  workman.  It  has  been  frequently  re- 
proached with  the  opposite  effect,  i.  e.,  of  stupefying  the 
workman  by  condemning  him,  for  example,  to  devote  his 
whole  life  to  making  pinheads  whilst  at  the  same  time 
impoverishing  him  by  partly  destroying  the  value  of 
manual  skill. 

The  first  reproach  proceeds  from  an  imperfect  grasp 
of  the  subject.  Undoubtedly,  in  certain  industries,  the 
long  apprenticeships  by  which  one  learned  to  make  all  the 
diverse  products  of  an  industry  are  no  longer  necessary 
because  division  of  labor  has  led  to  specialization ;  un- 
doubtedly  likewise,   an   ordinary   workman   aided   by   a 


62  Elements  of  Political  Economy 

machine  can  fill  the  position  which  formerly  required  a 
strong  and  skillful  workman.  It  follows  that  there  are 
certain  classes  of  workmen  whose  labor  is  no  longer  so 
much  sought,  and  whose  wages  are  no  longer  so  high  as 
formerly. 

But  all  workmen  who  operate  machines  are  forced  to 
greater  activity  because  in  general  a  machine  moves 
rapidly  and  it  is  necessary  to  be  quick  in  operating  it. 

Machines  are  complicated  and  skillful  tools.  Their 
construction  ordinarily  implies  an  exercise  of  intelligence 
on  the  part  of  the  workmen  who  have  produced  them 
greater  than  that  required  for  the  manufacture  of  the 
simple  tools  formerly  used.  Their  use  often  demands 
more  intelligence  likewise.  It  is  evident,  for  example, 
that  the  good  woman  who  turns  the  distaff  exhibits  less 
activity  and  intelligence  than  the  operator  who  has  charge 
of  a  thousand  spindles,  and  gathers  up  and  ties  the  broken 
threads  with  such  dexterity  that  one  finds  it  difficult  to 
perceive  what  she  is  doing. 

Finally,  we  must  not  overlook  the  service  which 
machinery  has  rendered  in  contributing  to  a  diminution 
of  the  hours  of  work  in  many  industries,  thanks  to  an 
abundant  production  in  a  short  space  of  time,  and  in  con- 
tributing to  a  rise  in  wages;  two  results  which  offer  to 
the  workman  the  leisure  and  the  means  of  developing  his 
intelligence  by  instruction. 

These  results,  so  harmonious  on  the  whole,  do  not 
necessarily  imply  that  the  use  of  machinery  is  free  from 
all  inconveniences.  On  the  one  hand,  the  close  applica- 
tion it  exacts  sometimes  produces  considerable  fatigue  in 
the  operative.  On  the  other  hand,  the  use  of  machinery, 
operating  automatically,  diminishes  the  demand  for 
manual  skill,  so  that  in  those  industries  it  is  rarer  to-day 


Production  of  Wealth  63 

than  formerly  to  encounter  workmen  capable  of  perform- 
ing a  diversity  of  tasks  or  giving  to  a  piece  of  work  its 
proper  finish. 

30.  Displacement  of  Labor  by  Machinery. — Is  it  true 
that,  whilst  leading  to  cheaper  products,  and  a  benefit  for 
the  entrepreneur,  machinery  brings  ruin  upon  the  working 
class  by  causing  the  discharge  of  workmen,  as  alleged, 
and  that  the  final  result  of  its  introduction  is  to  make  the 
rich  richer  and  the  poor  poorer?  Threej-quarters  of  a 
century  ago  Sismondi  brought  this  charge  against  it,  and 
others  since  his  day  have  repeated  and  emphasized  it.  In 
order  to  dissipate  this  notion  it  suffices  to  recall  two 
elementary  conceptions  of  political  economy. 

1.  It  is  with  products  that  products  are  bought. 
Accordingly,  the  more  each  worker  produces  in  a  day  the 
greater  is  the  quantity  he  can  consume  by  way  of  remuner- 
ation for  his  work. 

2.  Capital  is  born  of  saving.  It  is  capital  which 
makes  employment  possible  and  feeds  the  wage-earner 
whilst  the  product  of  his  labor  is  still  unmarketable.  It 
follows  that  the  additional  gain  to  the  employer  resulting 
from  the  use  of  a  new  machine  (gains  capable  of  being 
capitalized,  at  least  in  part)  will  procure  work  for  the 
wage-earner  either  in  the  same  industry,  the  cheapness  of 
whose  products  will  open  for  it  new  and  wider  markets, 
or  in  some  other  industry. 

Bastiat  has  clearly  explained  this  in  the  following 
example  so  often  cited :  "John  Jones  has  $2.00  which 
he  can  offer  two  workmen  an  opportunity  to  earn.  He 
conceives  a  new  device  which  lessens  the  necessary  labor 
by  one-half.  He  obtains  the  same  satisfaction,  saves  a 
dollar  and  dismisses  a  workman.  He  dismisses  a  work- 
man, that  part  of  the  operation  is  quite  manifest ;  but  this 


64  Elements  of  Political  Economy 

is  only  half  of  the  economic  phenomenon.  What  one 
does  not  observe  immediately  is,  that  if  the  invention  has 
produced  an  idle  workman,  it  has  likewise  produced  an 
idle  dollar  in  the  hands  of  the  capitalist.  These  two  ele- 
ments meet  and  combine,  and  it  becomes  clear  that  be- 
tween the  offers  and  demand  of  labor,  and  between  the 
offer  and  demand  of  capital,  the  relation  has  in  nowise 
been  changed.  By  the  aid  of  the  new  invention  one 
workman  paid  with  the  first  dollar  now  performs  the  task 
which  formerly  required  two  workmen.  The  second 
workman  paid  with  the  second  dollar  undertakes  some 
new  task.  What  change  has  then  taken  place  in  the 
world?  An  additional  want  has  been  satisfied.  In 
other  words,  the  invention  is  a  gain  for  humanity.  Its 
definite  result  is  an  increase  of  satisfaction  for  an  equal 
amount  of  work. 

"Who  gets  the  benefit  of  this?  At  the  start  it  is  the 
inventor,  the  capitalist,  the  first  who  uses  the  machine 
successfully,  and  this  is  the  recompense  of  his  genius  and 
his  courage.  In  this  instance  he  realizes  an  economy  in 
the  cost  of  production,  an  economy  which,  no  matter  how 
it  may  be  employed  (and  it  always  is  employed),  gives 
occupation  to  just  as  many  hands  as  the  machine  has  dis- 
placed. But  soon  competition  forces  him  to  lower  the 
price  of  the  product  in  the  measure  of  the  economy  real- 
ized. From  that  moment  it  is  no  longer  the  inventor  who 
receives  the  benefit  of  the  invention :  it  is  the  purchaser, 
the  consumer,  the  public,  including  the  working  class ;  in 
a  word,  humanity.  What  one  does  not  at  first  see  is  that 
the  saving  thus  effected  for  all  consumers  forms  a  new 
fund  which  employs  the  labor  the  machine  has  displaced." 

Ver)'  often  in  this  field  of  inquiry  the  facts  conform 
to  the  theory.     Statistics  show  that  the  ranks  of  industry 


Production  of  Wealth  65 

are  nowhere  so  large  as  in  countries  where  machinery  is 
used  freely,  and  that  at  least  in  industry,  if  not  in  agricul- 
ture, the  number  of  employees  increases  with  the  in- 
creased use  of  machinery.  It  is  augmentation  of  the 
means  of  subsistence  which  conduces  most  to  high  salaries, 
and  an  increase  of  population.  The  use  of  new  machin- 
ery in  industry  plays  the  same  part  in  this  respect  as  the 
opening  up  of  new  lands  to  agriculture.  We  find  the 
most  rapid  increase  of  population  and  the  highest  w'ages 
in  regions  where  these  conditions  prevail. 

One  may  say  that  machines  attract  and  multiply 
workmen. 

It  does  not  follow  that  the  introduction  of  a  new 
machine  in  an  industry  may  not,  like  every  modification 
of  the  social  economy,  bring  temporary  difficulty  and  even 
permanent  injury  to  certain  interests.  Nevertheless,  the 
economic  revolution  goes  on  ordinarily  with  a  certain 
degree  of  slowness  because  new  tools  are  expensive,  be- 
cause— mistakenly  most  often — one  continues  to  make 
use  of  the  old  tools  as  long  as  he  is  able  to  withstand  inno- 
vation, and  because  all  employers  do  not  make  the  change 
at  the  same  time.  Workmen  thus  have  a  period  of  warn- 
ing. Old  workmen  have  time  in  which  to  gradually  enter 
other  shops,  and  new  workmen  are  estopped  from  engag- 
ing in  the  industry  menaced.  Unfortunately,  all  do  not 
know  how  to  profit  by  the  warning,  or  are  not  in  a  posi- 
tion to  do  so. 

It  is  a  false  notion  that  the  injury,  when  there  is  one, 
affects  only  the  wage-earner. 

They  who  are  the  quickest  to  make  the  change  and  to 
enter  new  fields  are  the  individuals  who  sufifer  least  from 
a  crisis  of  this  kind.     Circulating  capital  is  favored  in 

5 


66  Elements  of  Political  Economy 

this  respect;  it  can  detach  itself  promptly,  though  not 
always  without  injury,  and  seek  other  investment. 

The  enterepreneur  and  the  workmen  come  next  in 
point  of  vantage.  Nevertheless  it  is  true  that  representa- 
tives of  both  these  classes,  when  they  are  old,  or  when 
they  are  not  sufficiently  active  or  intelligent,  are  con- 
demned to  see  the  source  of  their  income  diminished  or 
completely  dry  up,  and  are  often  exposed  to  ruin. 

Fixed  capital  is  that  which  suffers  most,  particularly 
when  new  machinery  is  of  such  a  kind  as  to  revolutionize 
an  industry. 

Example:  When  railways  displaced  stage  coaches, 
the  employees  of  the  latter  suffered ;  nevertheless,  to-day 
travel,  being  many  times  as  active  as  it  was  fifty  years  ago, 
calls  for  the  employment  of  many  times  as  many  persons 
as  formerly,  and  gives  the  majority  of  them  an  opportunity 
to  earn  higher  wages.  The  inns  along  the  deserted  high- 
ways have  been  ruined  and  new  capital  has  been  invested 
in  large  hotels  in  the  towns. 

31.  Circulating  Capital. — Capital  which  is  used  to 
meet  the  general  expenses  of  an  establishment,  and  for  the 
payment  of  salaries  and  wages,  is  not  fixed  capital.  It 
may  be  entirely  consumed  each  month,  or,  for  that  matter, 
each  day.  If  the  operations  of  the  establishment  are  suc- 
cessful, it  follows  that  this  capital  must  be  found  entire 
in  the  product  obtained  each  day  or  each  month;  this  is 
the  distinctive  character  of  circulating  capital. 

It  is  then  as  circulating  capital  that  we  should  class 
all  capital  which  is  consumed  entirely  in  a  short  space  of 
time,  and  which  must  be  recovered  in  its  entirety  from 
the  several  products  of  the  establishment.  It  is  well  for 
the  entrepreneur  to  likewise  distinguish  between  outlays 
for  raw  material  and  the  simple  running  expenses  of  the 


Production  of  Wealth  6"/ 

establishment.  The  commercial  ability  of  the  entre- 
preneur consists  largely  in  knowing  how  to  regulate  the 
double  movement  of  receipts  and  expenditures.  He  is 
placed  between  two  dangers.  If  the  outgo  is  too  large  his 
cash  is  soon  exhausted,  and  his  operations  are  interrupted ; 
perhaps  he  fails.  If,  on  the  other  hand,  he  accumulates 
too  much  cash  without  embarking  in  new  affairs  his 
capital  becomes  unproductive,  and  his  profits  cease.  To 
sum  up,  all  the  circulating  capital  of  an  enterprise  em- 
braces : 

1.  A  provision  for  running  expenses  which  is  com- 
posed of  money  and  bills  receivable,  and  which  includes 
the  wages  and  salary  fund,  and  a  fund  for  the  mainte- 
nance of  the  employer. 

2.  Raw  material,  which  naturally  divides  itself  into 
raw  material  proper  and  accessory  material. 

3.  Unfinished  products  in  process  of  manufacture. 
To  these  we  may  add  manufactured  products  finished  but 
still  in  the  warehouse.  These  latter  really  form  a  class 
by  themselves  in  the  economic  inventory  of  wealth,  be- 
cause they  are  not  actually  employed  in  production.  The 
manufacturer,  however,  usually  reckons  them  as  capital. 

4.  That  part  of  the  fund  of  consumption  which  is  not 
converted  into  money,  but  is  directly  consumed,  such  as 
household  provisions,  clothing,  etc. 

Fixed  capital  is  not  separated  by  any  impassable 
barrier  from  circulating  capital.  One  beholds  capital 
passing  frequently  from  one  category  to  the  other.  This 
happens  when  the  purchase  money  of  a  new  machine  is 
taken  from  the  cash  or  circulating  capital,  and  it  is  con- 
stantly going  on  through  the  amortization  of  the  fixed 
capital  of  an  enterprise.  An  object  which  is  circulating 
capital  in  one  place  may  be  fixed  capital  in  another.     Thus 


68  Elements  of  Political  Economy 

a  steam  engine,  which  may  be  circulating  capital  in  the 
hands  of  its  builder,  becomes  fixed  capital  in  the  hands  of 
the  manufacturer  who  buys  it.  One  might  even  say  that 
money  which  is  circulating  capital  for  individuals,  who 
constantly  consume  it,  is  after  a  fashion  fixed  capital  for 
the  country  in  which  it  circulates  without  being  consumed, 
at  least  not  immediately. 

The  man  who  employs  his  money  and  seeks  a  dis- 
posal of  it  best  calculated  to  yield  interest  is  said  to  invest 
his  money.  We  have  here  an  instance  of  circulating 
capital  which  is  perhaps  transformed  into  fixed  capital 
by  the  purchase  of  stocks  and  bonds,  these  representing  a 
share  or  credit  in  an  industrial  enterprise.  This  capital 
the  owner  may  immediately  withdraw  or  restore  to  the 
condition  of  circulating  capital  by  selling  the  securities. 

Resume 

Saving  consists  in  not  paying  out  immediately  for  the 
satisfaction  of  personal  needs  the  whole  product  of  one's 
labor  or  the  whole  of  one's  income. 

The  two  cardinal  virtues  of  political  economy  are 
labor  and  saving,  which  may  be  termed  respectively  the 
creator  and  preserver  of  wealth. 

To  capitalize  savings  is  to  employ  them  in  production. 

Consumption  capital  is  the  portion  of  wealth  applied 
to  personal  maintenance  and  luxury. 

Capital  being  an  advance  or  loan  to  production  has  a 
right  to  be  recuperated  either  immediately  and  in  its 
totality,  or  little  by  little,  and  in  installments,  from  the 
products  which  it  has  helped  to  create.  Capital  cannot 
be  made  productive  without  being  consumed.  If  existing 
capital  is  transmitted  from  year  to  year  or  from  age  to 
age  it  is  not  by  conservation,  but  by  perpetual  renewal. 


Production  of  Wealth  69 

The  formation  of  intellectual  capital  calls  for  a  con- 
siderable expenditure  of  material  capital. 

Labor  in  civilized  society  can  accomplish  nothing 
without  capital;  capital  can  accomplish  nothing  without 
labor;  they  are  necessary  allies.  Capital  feeds  labor,  and 
helps  render  manual  labor  less  arduous :  it  controls  labor. 
The  more  capital  there  is,  the  greater  are  the  opportunities 
for  employment. 

Machinery  economizes  labor  and  renders  products 
cheaper ;  it  spares  the  workman  the  hardest  tasks,  and  like 
capital,  of  which  it  forms  a  part,  lightens  manual  labor; 
it  makes  production  more  rapid  and  abundant,  and  conse- 
quently increases  wealth ;  it  augments  man's  power  over 
nature  by  multiplying  his  physical  strength  and  conferring 
upon  him  qualities  which  his  organs  do  not  possess.  Up 
to  a  certain  point  it  constitutes  a  safeguard  against  stop- 
page of  work.  It  disciplines  the  workman.  It  exacts  on 
the  part  of  the  workman  more  activity,  and  in  certain 
cases  more  intelligence.     It  tends  to  raise  wages. 

Fixed  capital  embraces  first,  land  and  buildings;  sec- 
ond, improvements  in  the  land ;  third,  the  cost  of  installa- 
tion ;  fourth,  industrial  furniture. 

Circulating  capital  embraces  first,  the  capital  required 
to  meet  running  expenses,  such  as  wages,  maintenance 
and  general  outlay;  second,  raw  material;  third,  products, 
both  finished  and  unfinished ;  fourth,  consumption  capital 
in  kind. 

v.— INDUSTRIAL  ORGANIZATION 

32.  Cooperation  and  Division  of  Labor.  33.  Classification  of  In- 
dustries. 34.  The  Role  of  the  Entrepreneur  and  of  the  Wage- 
Earner.  35.  Association.  36.  Industrial  Corporations.  37.  Historic 
Review  of  Trades  and  Trade  Regulations  in  Europe.     38.     Estab- 


JO  Elements  of  Political  Economy 

lishment  of  Freedom  of  Contracts.     39.  Advantages  of  Freedom  of 
Contract.     40.  Competition. 

32.  Cooperation  and  Division  of  Labor. — A  solitary 
being  on  a  desert  island  must  produce  utilities  to  sus- 
tain life,  but  however  great  his  efforts,  he  will  succeed 
in  producing  far  less  than  the  average  man  living  in  the 
social  state.  Why?  Because  he  cannot  practice  cooper- 
ation and  the  division  of  labor,  which  is  its  corollary. 
Let  us  now  suppose  two  men  on  an  island,  one  a  carpenter, 
the  other  a  mason.  They  have  each  been  at  work  inde- 
pendently trying  to  build  a  house.  The  work  has  pro- 
ceeded slowly  and  the  result  has  not  been  satisfactory. 
It  is  clear  to  them  that  it  would  be  better  to  combine  their 
efforts.  This  done,  they  construct  more  comfortable 
houses  in  a  shorter  space  of  time.  The  faculty  of  coop- 
eration is  that  it  increases  the  productive  power  of  the 
zuorker. 

In  the  constant  practice  of  the  kind  of  work  which 
pleases  him,  each  of  these  two  men  has  become  more 
skilled.  By  working  together  they  have  the  double  ad- 
vantage of  division  of  labor  and  cooperation.  Division 
of  labor  renders  work  more  productive,  each  performing 
better  the  task  he  has  become  accustomed  to,  and  saving 
time  through  not  being  compelled  to  pass  from  one  occu- 
pation to  another.  Cooperation,  accomplished  either  by 
association  in  labor  or  by  exchange,  enables  both  to  profit 
by  the  increase  of  productivity.  This  is  what  takes  place 
daily  in  society  without  the  need  of  any  special  under- 
standing between  the  parties. 

A  cloth  maker  who  at  first  had  but  two  machines,  one 
for  himself  and  one  for  his  wife,  the  two  doing  everything 
themselves,  and  losing  considerable  time  at  each  change 
of  occupation,  has  now  a  factory  and  numerous  workmen. 


Production  of  Wealth  yi 

He  is  careful  to  clearly  define  for  each  workman  the  spe- 
cial task  which  he  is  to  accomplish.  Children  perform 
light  tasks  which  demand  but  little  attention  and  effort : 
women  perform  work  which  is  light  but  more  important, 
and  that  which  demands  the  most  skill  and  strength  is 
left  for  the  men.  The  foreman  and  his  assistants  direct 
the  work  without  themselves  operating  a  single  machine. 
Bookkeepers  keep  the  accounts,  and  a  cashier  receives  and 
pays  out  the  money.  While  the  proprietor  gives  his  at- 
tention to  his  business,  his  domestics  spare  him  the  thou- 
sand little  cares  of  life  which  would  absorb  much  of  his 
time.  Each  has  his  work,  and  work  which  conforms  as 
closely  as  possible  to  his  capacity.  No  doubt  exists  as  to 
the  result :  The  sum  of  the  products  obtained  by  such 
cooperation  will  be  far  greater  than  any  results  the  same 
workmen  could  accomplish  in  a  like  period  of  time  if  they 
were  isolated  and  forced  to  perform  by  themselves  all  the 
operations  connected  with  the  manufacture  of  cloth. 

Adam  Smith  was  so  struck  with  the  importance  of  the 
division  of  labor  that  it  was  with  its  demonstration  that 
he  began  his  great  work  on  the  sources  of  wealth.  The 
example  he  has  chosen,  that  of  a  manufacturer  of  pins, 
in  which  ten  workmen  are  performing  a  small  number  of 
operations,  and  always  the  same  operations,  succeeding 
in  producing  48,000  pins  a  day,  has  remained  classic, 
although  the  result  he  mentions  is  greatly  surpassed  in 
this  industry  to-day. 

From  these  examples  are  drawn  several  conclusions : 
I  St.  Cooperation  may  be  either  direct,  as  when 
several  persons  work  together  for  the  completion  of  the 
same  product,  causing  new  relations  of  employer  and  em- 
ployed, or  it  may  be  indirect,  as  when  several  persons  aid 
each   other  mutually  by  the  exchange  of  useful   things 


^2  Elements  of  Political  Economy 

which  they  produce  separately.  This  last  form  of  coop- 
eration g-ives  rise  to  the  diversity  of  professions. 

2nd.  Division  of  labor,  whether  taking  the  form  of 
separate  tasks  in  the  same  workshop,  or  of  a  multiplica- 
tion of  industries,  is  the  result  of  a  state  of  wealth.  It 
can  arise  only  when  there  exist  consumers  in  sufficient 
number,  such,  for  example,  as  will  give  the  baker  enough 
customers  to  enable  him  to  support  himself  by  his  calling, 
will  render  the  manufacturer  reasonably  sure  of  placing 
the  cloth  he  makes,  and  will  afford  the  physician  sufficient 
patients  to  permit  him  to  earn  a  competence. 

Thus  the  larger  the  community,  the  greater  is  the 
division  of  labor;  in  a  village  there  exists  but  little.  No- 
where in  a  given  country  does  one  encounter  such  a 
diversity  of  professions  and  so  many  specialists  in  each 
profession  as  in  its  metropolis.  If  a  country  village  finds 
itself  possessed  of  a  large  manufactory  practicing  exten- 
sive division  of  labor,  it  is  because  the  manufacturer  seeks 
his  customers,  not  in  the  small  community  about  him,  but 
in  the  world's  markets.  The  extent  of  the  division  of 
labor  accordingly  depends  on  the  extent  of  the  market 
i.  c. ,  on  the  number  and  wealth  of  customers. 

It  depends  likewise  on  the  existing  stage  of  develop- 
ment of  science,  and  on  the  nature  of  the  work. 

Thus,  for  example,  machinery  renders  possible  a 
division  of  labor  formerly  impossible;  and  certain  occupa- 
tions, such  as  farming,  do  not  lend  themselves  to  a  division 
of  lalx)r  such  as  is  possible  in  the  manufacture  of  cloths  or 
pins. 

3rd.  As  has  been  stated,  division  of  labor  augments 
the  productive  capacity  of  the  worker.  It  is  a  necessary 
condition  to  the  creation  of  wealth  just  as  it  is  a  conse- 
quence of  wealth.     Without   it  there  would  be  no  ex- 


Production  of  Wealth  73 

change  and  little  incentive  to  increase  production.  This 
is  clearly  perceived  in  regions  which  are  exclusively  agri- 
cultural. With  it,  the  skill  of  the  workman  is  increased, 
there  is  less  loss  of  time,  and  the  invention  of  tools  and 
machinery  calculated  to  shorten  labor,  or  improve  the 
product,  is  rendered  easier  by  a  concentration  of  intel- 
lectual efifort  on  the  part  of  a  certain  number  of  individuals 
upon  the  same  object. 

33.  Classification  of  Industries. — Productive  labor 
of  all  kinds  is  designated  by  the  general  term  "Industry/' 
which  is  human  activity  devoted  to  the  production  of 
utilities. 

This  activity  may  be  employed,  first  in  drawing  from 
the  earth  and  sea  by  extraction  or  cultivation  nutritious 
substances  and  material  of  all  kinds;  second,  in  working 
over  in  different  ways  the  material  thus  obtained  and  pre- 
paring it  for  use;  third,  in  caring  for,  transporting  and 
exchanging  natural  products  and  manufactured  objects, 
choosing  the  place  and  time  where  they  may  be  sold  to 
most  advantage. 

The  first  class,  in  which  the  earth  is  the  principal  in- 
strument, includes  agriculture,  fisheries,  the  chase  and  the 
extractive  industries.  The  second,  in  which  raw  material 
is  worked  over  by  labor  and  capital,  is  called  manufactur- 
ing industry,  or  industry  proper.  The  third,  in  which 
labor  and  capital  are  applied  to  the  exchange  of  products, 
is  called  commerce. 

Man  labors  in  order  to  satisfy  needs,  and  his  labors 
must  conform  to  the  nature  and  diversity  of  these  needs. 
Accordingly,  a  proper  classification  of  the  numerous  in- 
dustries embraced  in  human  activity  should  be  based  on 
a  classification  of  man's  needs.  These  needs  are  needs  of 
body  and  of  mind,  or  material  and  intellectual  needs.     We 


74  Elements  of  Political  Economy 

must  nourish,  clothe  and  house  the  body  and  transport  it ; 
must  instruct  the  mind,  and  afford  it  recreation.  This 
gives  rise  to  the  industries  devoted  to  the  satisfaction  of 
each  of  these  needs.  The  need  of  nourishment  is  largely 
supplied  directly  by  agriculture,  certain  of  whose  products, 
such  as  fruit,  vegetables  and  meat,  require  no  industrial 
manipulation  to  fit  them  for  consumption. 

In  the  manufacture  of  products  suited  to  the  satisfac- 
tion of  our  personal  needs,  it  is  often  necessary  to  give  to 
the  material  one  or  more  preliminary  forms;  w^e  must 
always  employ  tools,  and  nearly  always  machinery  and 
chemical  agents.  The  more  industry  is  developed,  the 
more  numerous  and  complicated  are  the  tools  and  machin- 
ery, and  the  greater  is  the  role  played  by  chemical  agents. 
We  have,  then,  a  particular  class  of  industries  which  seek 
to  make  production  easy  and  which  we  may  call  prepara- 
tory industries;  such  are  the  mechanical  and  chemical 
industries. 

34.  The  Roles  of  Entrepreneur  and  Wage-Earner. — 
We  have  seen  that  the  division  of  labor  involves  the 
establishment  of  shops  in  which  a  number  of  workers 
cooperate  in  the  production  of  the  same  objects.  Thence 
arise  diverse  responsibilities  and  the  relations  of  subor- 
dinate and  superior.  Whoever  undertakes  on  his  own 
account  to  fashion  a  product  or  execute  a  bit  of  work  is 
an  entrepreneur.  The  entrepreneur  who  labors  alone 
without  a  body  of  men  under  him,  or  with  the  sole  assist- 
ance of  his  family,  or  possibly  one  or  two  assistants,  is  an 
artisan.  The  entrepreneur  who  makes  use  of  workmen 
is  an  employer;  he  exercises  authority  over  his  subor- 
dinates whom  he  pays,  and  the  products  of  whose  labor 
belong  to  him  according  to  agreement.  There  are  em- 
ployers of  widely  different  means,  some  having  but  few 


Production  of  Wealth  75 

workmen,  differing  but  little  from  artisans,  others  having 
hundreds,  or  even  thousands  of  workmen  and  employees, 
and  designated  as  entrepreneurs,  captains  of  industry, 
manufacturers,  managers,  or  merchants. 

The  wage-earner  is  he  who  works  under  the  orders  and 
for  the  account  of  another;  he  does  not  sell  products,  he 
sells  his  labor  and  time.  There  are  different  kinds  of 
wage-earners :  the  laborer  who  hires  his  labor  in  order  to 
practice  his  craft,  cooperating  under  the  orders  of  the 
employer,  in  the  manufacture  of  certain  definite  products, 
or  the  execution  of  certain  work,  and  who  hires  himself 
by  the  task,  by  the  day,  or  by  the  month ;  the  employee, 
who  hires  his  time  ordinarily  by  the  month  in  order  to 
accomplish  under  the  administration  and  orders  of  the 
employer  certain  manual  or  intellectual  labor,  such  as 
clerical  duties,  or  the  duties  of  salesmen;  the  domestic, 
who  lets  his  time  by  the  day  or  month  in  order  to  perform 
personal  service  in  the  house  of  the  master. 

Office  holders,  and  those  who  follow  the  liberal  profes- 
sions, are  likewise  producers  of  a  certain  kind ;  the  first 
are  classed  amongst  wage-earners,  the  second  are  some- 
times entrepreneurs,  and  sometimes  wage-earners. 

35.  Association. — Several  entrepreneurs  may,  with- 
out subordinating  themselves  one  to  another,  unite  their 
efforts  and  their  capital  in  order  to  cooperate  in  the  same 
industrial  enterprise,  and  divide  the  profits  :  this  is  what  is 
called  association.  Association,  like  the  division  of  labor 
and  cooperation,  is  one  of  the  most  important  forms  of 
industrial  organizations.  So  long  as  industry  is  but  little 
developed,  and  capital  is  scarce,  association  plays  but  a 
restricted  part.  Association,  like  so  many  forms  of 
economic  life,  has  been  developed  as  a  result  of  liberty 
and    wealth.     It    has   to-dav    become   one   of   the   most 


yd  Elements  of  Political  Economy 

powerful  forces  which  human  industry  has  at  its  disposal, 
and  one  may  without  exaggeration  compare  its  beneficent 
action  upon  industrial  organization  to  that  of  machinery 
on  manual  labor.  By  it,  vast  enterprises,  such  as  rail- 
ways, which  surpass  the  measure  of  individual  fortunes, 
have  become  possible.  Association  is  the  union  of  various 
entrepreneurs,  or  the  union  of  capital  furnished  by 
various  persons  for  the  same  enterprise;  it  is  a  mode  of 
industrial  organization  whose  object  is  to  augment  pro- 
ductive power  and  it  may  increase  productive  power  to  an 
indefinite  degree. 

Association  may  be  formed  between  severaP*persons 
who  unite  their  labor  and  their  capital  in  an  industrial 
enterprise  and  who  accept  unreservedly  the  full  responsi- 
bility of  the  success  or  failure  of  the  enterprise.  This  is 
the  ordinary  partnership,  the  type  of  association  most 
frequently  employed. 

It  may  be  formed  between  various  persons,  some  of 
whom  furnish  the  capital  and  labor  and  accept  the  full 
responsibility  of  the  enterprise,  whilst  others  furnish  only 
capital,  and  this  to  a  determinate  amount;  this  is  w^hat  is 
known  as  a  limited  partnership. 

It  may  be  formed  by  simple  association  of  capital 
without  anyone  being  responsible  to  the  whole  extent  of 
his  fortune.  In  this  case  the  capital  is  combined  under 
the  form  of  shares,  and  no  one  is  responsible  beyond  the 
value  of  the  share  he  holds.  This  is  the  association  of 
capital,  of  nothing  but  capital  and  in  a  determinate  quan- 
tity. Capital  is  the  real  employer;  the  managers, 
whether  they  have  or  have  not  an  interest  in  the  profits, 
are  wage-earners.  This  is  the  ordinary  stock  company, 
the  kind  of  association  which  in  the  present  century  has 
given  birth  to  the  largest  enterprises. 


Production  of  Wealth  yj 

The  difference  between  these  various  kinds  of  associ- 
ation hinges  rather  upon  the  rights  of  persons  than  on 
the  use  of  capital.  In  all  of  them  the  capital  of  the  enter- 
prise is  an  aggregation  and  once  embarked  it  is  entirely 
consumed,  reproduced,  and  subject  to  the  same  chance 
of  gain  or  loss  or  total  destruction;  except  that  in  the 
first  form  (ordinary  partnership)  the  responsibility  ex- 
tends to  all  those  associated,  and  to  all  their  property, 
even  though  not  invested  in  the  enterprise. 

As  we  have  remarked,  it  is  the  association,  and  par- 
ticularly the  stock  company,  which  has  rendered  possible 
the  greater  part  of  the  industrial  enterprises  of  our  day — 
mines,  railways,  insurance  companies,  banks  and  manu- 
factories. No  one  individual  had  a  personal  fortune  suf- 
ficient for  these  enterprises,  or  if  he  had  it,  did  not  care  to 
venture  the  whole  of  it  in  a  single  enterprise.  What  a 
great  capitalist  could  not  accomplish,  many  little  ones 
together  have  accomplished.  No  other  form  of  industrial 
organization  has  thus  far  produced  such  a  powerful  union 
of  productive  forces ;  no  other  has  such  a  democratic  char- 
acter so  well  adapted  to  our  time.  It  furnishes  an  equally 
advantageous  implement  to  modest  savings  and  to  great 
fortunes.  Furthermore,  this  artificial  person,  the  cor- 
poration, has  a  continuous  existence  and  permits  of  length 
of  productivity,  an  element  requisite  for  many  modern 
enterprises. 

Economic  activity  is  helped  by  other  forms  of  associ- 
ation, educational,  professional,  religious,  etc.  Mutual- 
ity, which  constitutes  the  underlying  principle  of  all  asso- 
ciation, is  one  of  the  most  powerful  bonds  between  men. 

36.  Trade  Guilds  of  Europe. — At  Rome  under  the 
Republic,  a  portion  of  the  artisans  and  small  tradesmen 
were   grouped   in   corporations   called   Collegia.     These 


78  Elements  of  Political  Economy 

Collegia  eventually  participated  in  political  disturbances 
and  the  senate  suppressed  all  whose  formation  it  had  not 
especially  authorized.     The  Emperors  likewise  long  held 
the  Collegia  in  suspicion,  regarding  them  as  secret  socie- 
ties dangerous  to  public  order.     On  the  other  hand  from 
the  beginning  of  the  third  century  of  our  era,  they  re- 
garded them  as  a  means  of  keeping  the  tradesmen  in 
proper   bounds.     Alexander   Severus    (A.   D.    225-232) 
gave  them  a  legal  status  in  Rome,  and  from  Rome  they 
spread  to  the  provinces.     Later  on,  when  the  burden  of 
taxation,  weighing  down  the  people,   caused  the  cities 
and  the  fields  to  be  deserted,  imperial  edicts  bound  ar- 
tisans and  shopmen  more  and  more  closely  to  their  call- 
ing.    The  boatmen  who  brought  supplies  to  Rome  and 
particularly  those  who  transported  the  grain  destined  to 
feed  the  people  of  Rome  and  Constantinople  were  sub- 
jected to  numerous  regulations,  whilst  at  the  same  time 
favored  with  special  privileges,  honors  and  immunities, 
such  as  exemption  from  taxation.     Not  less  strict  were 
the  regulations  binding  the  tradesmen  who  sold   food. 
Bakers,  for  example,  could  not  forsake  their  shops  with- 
out having  followed  their  calling  a  sufficient  time,  and 
then  only  provided  they  furnished  a  successor.     The  Em- 
perors had  come  to  regard  industrial  labor  not  as  the 
practice  of  a  right  which  they  sought  to  protect,  but  as 
the  performance  of  a  public  service,   which  they  were 
bound  to  exact.     By  the  end  of  the  first  century,  B.  C, 
the  Collegia  had  come  to  resemble  prisons.     The  mem- 
bers were  the  slaves  of  their  calling,  and  their  slavery 
was  the  more  rigorous  according  as  their  services  were 
the  more  useful  to  the  state,  particularly  in  the  matter  of 
supplying  foodstuff.     After  the  invasion  of  the  Roman 
Empire  by  the  Germans,  when  many  of  the  cities  were 


Production  of  Wealth  79 

pillaged,   industry   languished  or   disappeared   and   with 
it  the  Roman  Collegia,  of  which  we  find  no  revival  until 
the  beginning  of  the  twelfth  century,  except  perhaps  in 
certain  cities  of  Italy,  during  the  first  centuries  of  the 
Middle  Ages.     Under  the  feudal  system  rural  life  pre- 
vailed.    Nevertheless  during  and  even  before  the  cru- 
sades industry  gradually  revived  in  the  cities,  the  serfs 
securing  their  liberty  either  by  purchase  or  revolt.     The 
artisans,    small  handicraftsmen   working   alone  or   with 
one  or  two  "companions,"   and  an  apprentice,   felt  the 
need  of  uniting  for  the  purpose  of  resisting  the  demands 
of  their  masters,   of  protecting  themselves  against  the 
competition  of  artisans   coming  from  elsewhere,   or  of 
securing  by  rules  and  a  system  of  inspection  good  work- 
manship.    This  last  is  the  object  ordinarily  set  forth  in 
the  charters  of  the  trade  guilds.     As  previously  stated 
the  Roman  Collegia  ended  by  becoming  a  kind  of  prison ; 
the  trade  guilds  began  as  a  sort  of  fortress  behind  which 
the  artisan  and  tradesman  sheltered  himself  from  violence 
and  competition.     Toward  the  beginning  of  the  middle 
ages  the  Germans  had  guilds  which  appear  to  have  been 
social  organizations  formed  for  mutual  protection  just  as 
the  trade  guilds  were  formed  for  trade  protection.     In 
England  merchant  guilds  and  craft  guilds  appear  only 
after  the  Norman  Conquest ;  the  guilds  which  existed  be- 
fore that  period  had  apparently  only  a  social  or  religious 
character,  industry  being  but  little  developed.     Members 
of  the  merchant  guild  regulated  the  exercise  of  the  trade 
monopoly  conferred  on  a  borough  by  royal  grant,  and  laid 
charges  and  restrictions  upon  others  who  desired  to  trade 
in  the  borough.     With  the  appearance  of  the  craft  guild 
comprising  men  of  a  common  occupation,  and  later  of 
the  various  unions  of  dealers  as  distinguished  from  trad- 


8o  Elements  of  Political  Economy 

ing  artisans,  the  merchant  guild  gradually  decayed,  the 
supervision  of  the  trade  monopoly  passing  into  the  hands 
of  newer  organizations.  The  craft  guilds,  enjoying  a 
monopoly  in  the  practice  of  their  special  calling,  became 
very  oppressive,  surrounding  the  admission  of  new  mem- 
bers with  more  and  more  restrictions  and  making  the 
period  of  apprenticeship  unreasonably  long.  These 
abuses  gave  rise,  under  the  Tudors,  to  the  guilds  being 
brought  more  under  public  control,  and  before  the  ref- 
ormation set  in,  the  growth  of  industry  and  the  expand- 
ing ideas  of  liberty  had  already  begun  to  tell  upon  their 
prosperity. 

Flanders  in  the  Middle  Ages,  before  England,  had 
active  industries  and  flourishing  industrial  organizations. 
Before  the  fourteenth  century  it  was  the  merchant  guilds 
that  dominated  in  the  cities;  later,  as  in  England,  they 
were  forced  to  share  their  power  with  the  craft  guilds. 
The  craft  guilds  of  Flanders  were  particularly  jealous  of 
their  privileges  which  they  defended  against  outside 
competition  by  interdicting  the  practice  of  the  industries 
in  the  country,  and  against  competition  with  the  town 
by  limiting  the  number  of  machines  which  each  master 
could  employ.  The  religious  wars  mark  at  the  same  time 
the  .decline  of  industry  and  industrial  organizations. 

In  Germany  the  guilds  of  patricians  and  of  the  middle 
class  dominated  afifairs  in  the  imperial  cities  for  several 
centuries.  The  organization  of  artisans  which  had  be- 
gun to  form  quietly  in  other  countries  of  western  Europe 
during  the  twelfth  century,  and  which  in  the  fourteenth 
century  had  become  powerful,  conducted  a  long  struggle 
in  Germany  as  elsewhere  against  the  guilds  to  free  them- 
selves from  the  latter's  domination  and  share  their  priv- 
ileges. 


Production  of  Wealth  8i 

Toward  the  end  of  the  fifteenth  century  three  hun- 
dred German  cities  possessed  craft  guilds,  called  Zunften, 
the  monopoly  of  the  masters,  as  well  as  the  religious  char- 
acter of  its  organization  being  emphasized  in  their  stat- 
utes as  time  went  on.  By  the  side  of  the  organizations 
of  masters,  the  workmen  of  Germany  had,  to  a  greater 
extent  perhaps  than  workmen  elsewhere,  brotherhoods 
and  associations  covering  extensive  regions. 

In  Northern  Italy  there  were  numerous  and  powerful 
industrial  organizations  at  an  early  date,  as  industry  was 
active.  Their  organization  and  aim  differed  according 
to  locality.  In  Venice  they  were  strong  but  had  no 
voice  in  governing  the  repu1)lic,  whilst  at  Milan  and  Flor- 
ence they  waged  war  upon  the  aristocracy  and  nobility, 
and  upon  the  large  merchants,  and,  especially  in  the  fif- 
teenth century,  took  part  in  the  struggle  for  political 
power  in  the  cities. 

In  France  artisans  began  to  organize  in  the  twelfth 
century,  and  in  the  latter  part  of  the  thirteenth  we  have  a 
record  of  one  hundred  organizations  of  artisans  in  Paris. 
In  the  fifteenth  century  there  were  but  seventeen  cities  in 
the  Royal  dominion  in  which  the  workmen  were  not  or- 
ganized. During  the  economic  revival  which  followed 
the  one  hundred  years'  war,  their  number  increased, 
whilst  at  the  same  time  the  admission  to  membership  be- 
came more  difficult,  the  tendency  to  monopolize  the  priv- 
ileges of  masters,  which  we  have  noticed  in  other 
countries,  repeating  itself  here.  In  the  sixteenth  and 
seventeenth  centuries  the  crown  itself  seeking  to  augment 
its  revenues,  multiplied  the  craft  guilds.  At  the  same 
time  with  the  lamentable  object  of  furthering  fraud  in 
industry,  to  which  the  statute  of  the  guilds  opposed  an 
insurmountable  obstacle,  it  created  by  letters  patent,  royal 


82  Elements  of  Political  Economy 

and  privileged  industries  which  it  released  from  all  sub- 
ordination to  the  craft  guilds.  It  even  established  rules 
for  the  manufacture  of  fabrics  and  a  system  of  surveil- 
lance, which  served  to  hinder  progress  rather  than  insure 
a  good  quality  of  product. 

The  corporative  regime  prevailed  in  industry  in  nearly 
the  whole  of  civilized  Europe  from  the  Middle  Ages  down 
to  the  sixteenth  century  for  England  and  in  some 
countries  to  the  nineteenth  century. 

It  was  long  practiced  in  communities  where  industrial 
liberty  was  not  sufficiently  protected. 

The  organizations,  whilst  differing  notably  in  different 
epochs  and  countries,  had  certain  common  characteristics : 
the  statutes  which  conferred  upon  the  members  of  the 
guild  the  exclusive  privilege  of  practicing  the  craft,  fixed 
the  rights  of  the  members  and  the  processes  of  manufac- 
ture; elected  officers  who  administered  the  affairs  of  the 
corporation  and  enforced  its  statutes ;  masters  who  consti- 
tuted the  body  generally  limited  in  number,  and  who  had 
experienced  more  or  less  expense  and  difficulty  in  gaining 
admission,  the  sons  of  masters,  ordinarily  enjoying 
special  advantages  in  respect  to  admission ;  companions 
or  workmen  attached  to  the  body,  but  not  participating, 
or  participating  but  little,  in  its  privileges,  and  permitted 
to  present  themselves  for  admission  as  masters  only  after 
a  certain  period ;  and  finally  apprentices  learning  the  trade 
under  a  master  and  obliged  to  undergo  a  long  service 
before  being  admitted  to  the  second  stage  of  companion. 
We  have  seen  that  in  the  course  of  time  the  guilds  devel- 
oped abuses  which  were  the  natural  outcome  of  the  prin- 
ciple of  monopoly,  on  which  they  were  founded,  and  which 
constituted  an  obstacle  to  industrial  progress. 

2^y.     Establishment  of  Freedom  of  Contract  in  the 


Production  of  Wealth  83 

Principal  European  Countries. — England  was  the  first 
country  to  free  its  industry  from  the  bonds  of  guilds. 
Manufacture  began  in  the  sixteenth  century,  whilst  Henry 
VIII.  was  confiscating  the  property  of  the  guilds,  and  the 
religious  reformation  was  leading  to  the  suppression  of  the 
brotherhoods.  It  became  important  in  the  eighteenth 
century,  when  armed  with  the  steam  engine  and  machine 
tools ;  it  was  then  that  industry  was  born.  As  the  guilds 
hampered  it  in  the  towns  it  sought  by  preference  localities 
where  labor  was  free,  and  these  in  turn  became  important 
centers  of  population,  eclipsing  the  old  industrial  centers 
of  the  Middle  Ages.  Craft  guilds  were  not  actually  supy- 
pressed,  but  with  certain  rare  exceptions  lost  their  former 
authorities,  dwindling  to  mere  friendly  societies. 

In  Flanders  the  religious  wars  and  the  wars  between 
France  and  Spain  had  greatly  lessened  the  importance  of 
the  guilds.  The  final  annexation  of  the  Belgian  provinces 
to  France  resulted  in  the  guilds  being  suppressed,  as  had 
already  been  the  case  in  France.  The  same  thing  hap- 
pened in  the  German  provinces  on  the  left  bank  of  the 
Rhine.  When  the  Kingdom  of  Westphalia  was  estab- 
lished the  guilds  were  suppressed  ( 1808),  as  was  likewise 
the  case,  at  least  for  the  time  being,  in  the  other  states 
where  French  influence  made  itself  felt,  though  it  was 
much  later  that  the  freedom  of  contract  was  specifically 
recognized  by  law,  vis.:  1861  and  1862  in  Saxony  and 
Wurtemberg,  and  1869  in  Piiissia.  In  Northern  Italy 
guilds  had  disappeared  with  the  French  conquest. 

France,  which  set  the  example  for  the  continent,  broke 
away  definitely  from  the  regime  of  guilds  at  the  beginning 
of  the  revolution.  In  the  second  half  of  the  eighteenth 
century  French  writers  and  administrators  had  empha- 
sized the  inconveniences  of  the  guilds  and  demanded  free- 


84  Elements  of  Political  Economy 

dom  of  contract.  The  most  eminent  of  them,  Turgot, 
having  become  minister,  he  suppressed  the  craft  guilds  by- 
edict  in  1776,  but  the  opposition  aroused  caused  the  recall 
of  the  edict  within  a  few  months,  and  the  guilds  were  re- 
established, but  with  modifications  which  rendered  them 
less  close. 

38.  Trade  Unions. — The  trade  union,  which  is  a 
form  of  association,  is  ordinarily  a  free  grouping  of  indi- 
viduals who  unite  for  an  express  object,  in  contrast  to  the 
corporation,  which  is  a  legally  constituted  body,  enjoying 
certain  privileges.  Most  frequently  it  has  been  organized 
with  the  object  of  mutual  protection,  and  has  later  secured 
legal  recognition.  In  other  instances  it  was  directly 
created  by  the  public  authorities  in  the  interest  of  public 
order.  Trade  unions  being  vested  with  no  monopoly 
are  in  no  sense  industrial  corporations  like  the  old  trade 
guilds. 

39.  Advantages  of  Freedom  of  Contract. — The  right 
to  a  free  disposition  of  one's  labor  is  assuredly  one  of  the 
most  sacred  rights  of  man.  It  means  for  the  individual 
the  unrestricted  use  of  his  time,  of  his  hands,  of  his  intelli- 
gence :  it  is  an  essential  part  of  individual  liberty.  The 
exercise  of  this  right  is  moreover  profitable  to  society 
because  it  consists  in  serving  one's  self  by  serving  others. 
A  well  organized  society  must  protect  it  with  its  whole 
energy.  Only  a  backward  society  will  so  trample  it  under 
foot  as  to  make  slavery  possible,  and  that  society  is  a 
feeble  one,  which  being  unable  itself  to  defend  its  mem- 
bers, permits  certain  groups,  formed,  like  the  trade  guilds, 
for  mutual  defense,  to  monopolize  this  right.  A  strong 
and  well  organized  society  respects  and  favors  association 
as  it  respects  and  favors  all  proper  manifestations  of  indi- 


Production  of  Wealth  85 

vidual  activity.  It  is  bound  to  guard  the  feeble  as  well  as 
the  strong,  and  to  guarantee  to  each  the  free  exercise  of 
his  social  rights ;  it  alone  is  sufficiently  vigilant  to  accom- 
plish that  task.  Freedom  of  contract  can  produce  all  its 
beneficent  effects  only  in  a  well  organized  society. 

The  wisdom  of  maintaining  freedom  of  contract  is  one 
of  the  most  important  conclusions  of  economic  science, 
and  is  a  forcible  illustration  of  the  high  harmony  existing 
between  the  laws  of  the  useful  and  of  the  just.  This  is  a 
highly  important  role  of  economic  science.  Wherever 
weighty  questions  of  that  science  are  in  dispute,  it  will 
generally  be  found  that  their  true  solution  lies  on  the  side 
of  right  and  justice.  Economic  science  demonstrates 
that  it  is  from  the  most  complete  respect  for  the  rights 
of  man  that  the  greatest  abundance  of  products  results. 
The  advantages  of  freedom  of  contract  apply  to  agricul- 
ture and  to  commerce,  as  well  as  to  industry. 

Analyzing  more  in  detail  the  advantages  industry 
derives  from  it,  we  find  that, 

First:  It  fosters  competition,  a  prolific  source  of 
industrial  progress. 

Second:  By  removing  artificial  barriers  it  permits 
of  a  more  complete  use  of  individual  activities,  a  result 
of  much  importance,  since,  nothing  being  more  precious 
than  the  productive  force  of  man,  nothing  is  more  regret- 
table than  to  see  that  force  inactive  or  misdirected. 

Third:  It  conduces  to  a  better  use  of  capital  which 
finds  more  entrepreneurs  to  employ  it  profitably,  and 
entrepreneurs  engaged  in  industries  which  they  have 
themselves  chosen.  Manifestly,  striking  the  balance  of 
advantage  and  disadvantage,  the  total  gains  should  be 
greater  under  a  regime  of  freedom  of  contract,  not  only 
because  under  it  operations  are  more  numerous,  but  be- 


86  Elements  of  Political  Economy 

cause  they  are  conducted  by  those  better  quaHfied  to  con- 
duct them. 

Fourth :  It  leads  to  a  saving  in  cost  of  production, 
conducing  to  abundance  and  cheapness,  the  supreme  end 
of  economic  activity.  Producers  who  are  more  numerous 
and  more  skilled,  and  v^ho  practice  a  more  complete 
division  of  labor,  and  have  at  their  disposal  more  capital, 
are  naturally  better  fitted  to  realize  this  end. 

Fifth :  In  an  enlightened  community  it  tends  to 
diminish  the  causes  of  social  discontent.  It  awakens  am- 
bition in  the  breast  of  those  who  believe  themselves 
capable  of  independent  undertakings,  whilst  lessening  the 
number  of  those  who  can  lay  at  the  door  of  social  institu- 
tions the  charge  of  restraining  them  and  keeping  them,  in 
spite  of  their  talents,  in  an  inferior  position. 

Sixth :  It  improves  the  relation  of  employer  and 
employee.  Such  a  proposition  may  appear  paradoxical 
in  an  age  more  agitated  than  any  previous  period  by 
questions  relating  to  wages  and  to  the  organization  of 
labor.  But  this  agitation  does  not  imply  greater  discon- 
tent. It  means  simply  that  owing  to  the  practice  of 
political  liberty  men  can  now  give  expression  to  discon- 
tent with  a  freedom  and  effectiveness  which  was  formerly 
denied  them.  When  a  society  is  composed  of  citizens 
having  equal  political  rights,  and  sufficiently  enlightened 
to  reflect  upon  the  meaning  of  these  rights,  the  relations 
of  employer  and  employee  would  soon  become  impossible 
under  any  other  regime  than  that  of  freedom  of  contract. 

40.  Competition. — To  enumerate  the  consequences 
of  freedom  of  contract  is  in  reality  to  state  the  principle 
effects  of  competition  which  is  its  corollary.  It  is  a  mis- 
take to  magnify  the  evils  of  competition.  Competition 
is  generally  useful  when  it  is  honest. 


Production  of  Wealth  87 

A  merchant  is  established  in  a  certain  district.  By 
what  right  does  he  complain  of  other  merchants  establish- 
ing themselves  in  the  same  district?  His  wares  were 
perhaps  dear,  and  so  long  as  his  was  the  only  shop  there 
he  tried  but  little  to  satisfy  his  customers.  In  order  to 
keep  his  customers  he  must  now  pay  more  attention  to 
their  wants,  and  perhaps  lower  his  prices.  The  public 
will  be  better  served,  i.  e.,  obtain  more  or  better  service, 
for  a  given  outlay.  This  is  precisely  the  end  sought  by 
political  economy. 

A  manufacturer  sells  his  products  at  a  certain  price; 
another  comes  along  who  offers  the  same  products 
cheaper,  and  the  purchaser  prefers  him :  an  economic  end 
is  attained. 

A  great  shop  is  established  which  offers  an  abundant 
and  a  varied  assortment  of  wares,  and,  doing  a  large 
business,  can  accept  smaller  profits  on  each  article.  The 
ruin  of  the  small  tradesman  who  has  not  been  strong 
enough  financially,  or  not  skillful  enough,  to  resist  the 
competition  of  the  big  shop  is  regrettable,  but  his  case  is 
like  that  of  men  who  eke  out  an  existence  by  hand  labor 
after  the  introduction  of  machinery  has  transformed  their 
industry.  If  no  shop  is  invested  with  a  legal  monopoly, 
customers  who  abandon  the  small  shops  to  patronize  the 
large  one  do  so  because  they  find  it  to  their  advantage :  an 
economic  end  is  again  attained. 

Resume 

Cooperation  and  the  division  of  labor  increase  the  pro- 
ductive power  of  the  worker.  Division  of  labor  is  condi- 
tioned upon  the  stage  of  development  of  wealth  and 
science,  and  upon  the  nature  of  the  work.  It  is  intimately 
bound  up  with  freedom  of  contract. 


88  Elements  of  Political  Economy 

Industry  is  human  activity  applied  to  the  production 
of  utiHties.  It  embraces  agriculture,  together  with  hunt- 
ing and  fishing,  industry  proper,  (itself  divided  into  the 
extractive  and  manufacturing  industries),  and  commerce. 

The  body  of  producers  naturally  divides  itself  into 
entrepreneurs  (artisan  and  employer),  wage  earners 
(workmen,  employees  and  domestics),  clerks,  office 
holders,  and  persons  following  the  liberal  professions. 

Association  or  the  union  of  various  entrepreneurs  or 
of  capital  furnished  by  various  persons  for  the  same 
enterprise,  is  a  mode  of  industrial  organization  which  aims 
to  augment  the  productive  power,  and  which  can  increase 
productive  power  to  an  indefinite  degree.  The  principle 
kinds  of  association  are,  the  ordinary  partnership,  the 
limited  partnership,  and  the  stock  company.  No  other 
form  of  industrial  organization  has  thus  far  given  such 
power  to  productive  forces  as  the  stock  company  which 
supplies  a  medium  for  investment  equally  advantageous 
to  moderate  savings  and  to  large  fortunes. 

Trade  Guilds  are  legally  constituted  bodies  embracing 
all  the  artisans  of  the  same  trade  in  the  same  locality  and 
enjoying  a  monopoly  of  the  industry.  They  may  be 
useful  for  the  mutual  protection  of  artisans  in  a  society 
where  individual  security  is  not  sufficiently  assured. 
They  are  injurious  in  a  rich  and  active  society  where 
laws  suffice  for  the  guarantee  of  individual  security.  The 
Collegia  in  Ancient  Rome  were  a  form  of  Trade  Guild. 
Guilds  flourished  in  Central  and  Western  Europe  from 
the  twelfth  century  down  to:  the  seventeenth  century  in 
England,  the  period  of  the  revolution  in  France,  and 
the  latter  half  of  the  nineteenth  century  elsewhere.  They 
served  as  a  protection  to  the  small  industries  of  the  Middle 


Production  of  Wealth  89 

Ages,  but  proved  a  hindrance  in  the  modern  development 
of  industry  on  a  large  scale. 

Freedom  of  contract  is  an  essential  part  of  individual 
liberty.  Its  full  effects  can  only  be  felt  in  a  well  organized 
society.  It  favors  competition,  the  fuller  use  of  indi- 
vidual activities,  better  employment  of  capital,  cheaper 
production  and  diminution  of  social  discontent. 

Competition  is  a  rivalry  between  various  producers 
offering  services  of  a  like  nature  to  consumers;  it  leads 
the  producer  to  attract  the  consumer  by  more  advanta- 
geous offers. 


PART  II 

DISTRIBUTION  OF  WEALTH 

I 

PROPERTY 

42.  Property.  43.  The  right  to  Transmit  it.  44.  Communist 
Criticism  of  Property.  45.  The  Three  Factors  in  Production 
Entitled  to  Remuneration. 

42.  Property. — The  idea  of  property  is  intimately 
associated  with  the  idea  of  saving,  which  we  have  treated 
in  connection  with  capital.  It  is  saving  which  commonly 
gives  rise  to  property.  The  simplest  manner  of  acquiring 
property  is  to  appropriate  by  some  special  kind  of  work  an 
object  of  nature  which  does  not  belong  to  any  one.  The 
hunter  kills  his  game,  the  fisherman  catches  his  fish. 
They  can  both  say :  "This  is  the  result  of  my  labor  and 
the  thing  is  mine."  Each  of  the  two  may  consume  the 
thing,  destroy  it  or  preserve  it.  This  character,  which 
attaches  to  the  thing  to-day,  it  will  still  possess  to-morrow. 

In  a  civilized  country  where  the  land  is  occupied, 
simple  appropriation  is  the  exception.  But  the  farmer 
may  say :  "This  field  which  my  father  has  left  to  me,  or 
which  I  have  rented,  I  have  tilled,  planted,  harvested,  and 
by  my  labor  have  obtained  from  it  a  crop  of  wheat;  this 
wheat  is  mine."  The  weaver  in  the  same  fashion,  says : 
"On  the  machine  which  I  own,  and  with  the  thread  my 
wife  has  spun,  I  have  made  this  cloth;  the  cloth  is  mine." 
The  workman  will  say:     "With  a  portion  of  the  money 

90 


Distribution  of  Wealth  91 

received  for  my  labor  I  have  bought  this  clothing :  the 
clothing  is  mine." 

No  matter  what  the  object  on  which  the  labor  is  ex- 
pended, whether  yarn,  cabin,  wheat,  cloth  or  precious 
metal,  the  fruit  of  that  labor  belongs  properly  to  the 
laborer,  provided  the  material  on  which  the  labor  has 
been  expended,  or  by  the  aid  of  which  it  was  accomplished, 
was  already  his  or  was  a  natural  object  unappropriated : 
the  thing  is  his  own,  his  property. 

He  has  the  same  right  to  use  it  as  he  has  to  use  his 
personal  faculties,  his  physical  strength  and  his  intelli- 
gence. It  may  give  him  an  advantage  over  his  neighbors, 
but  he  may  be  likewise  superior  to  them  in  the  qualities 
just  mentioned,  owing  either  to  nature's  gifts  or  to  the 
foresight  of  his  parents  who  took  care  of  him  in  his  in- 
fancy, and  to  his  own  wisdom,  which  has  husbanded  and 
developed  these  faculties  by  labor  and  reflection.  The  pro- 
prietor may  say :  'T  might  have  idled  away  my  time  in 
pursuit  of  pleasure.  I  did  nothing  of  the  kind,  but  ex- 
pended my  physical  strength  or  mental  force  to  produce 
and  save  this  thing  which  is  useful ;  it  very  properly  be- 
longs to  me." 

We  may  define  property  as  the  right  to  use  and  dispose 
of  things.  We  might  have  said  the  absolute  right  except 
for  the  fact  that  in  the  social  state  the  right  is  very 
properly  conditioned  upon  respect  for  the  right  of  others 
and  upon  certain  requisites  of  social  order. 

The  imprint  of  man's  personality  stamped  by  his  labor 
upon  matter  is  then  the  fundamental  source  of  property. 

Having  the  right  to  use  and  dispose  of  property  for 
one's  self  it  naturally  follows  that  one  may  dispose  of  it 
in  favor  of  another.     The  right  to  property  implies  the 


92  Elements  of  Political  Economy 

right  to  sell,  give  and  bequeath  it,  and  this  transmission 
gives  the  new  owner  all  the  rights  of  the  former  owner. 

It  was  the  consciousness  of  this  right  of  possession 
which  led  the  fisherman  of  whom  we  have  spoken  above 
(see  par.  21)  to  postpone  the  enjoyment  of  the  fruits  of 
his  labor.  If  he  had  not  possessed  that  consciousness  or 
if  he  had  believed  that  violence  would  prevent  his  exer- 
cising his  right,  he  would  perhaps  have  consumed  imme- 
diately the  whole  product  of  his  labor;  or  he  may  not 
have  taken  the  trouble  to  preserve  the  surplus ;  or,  again, 
he  may  not  have  worked  longer  than  strictly  necessary 
to  satisfy  his  immediate  needs,  taking  no  thought  of  to- 
morrow, because  such  thought  would  be  vain. 

We  may  distinguish  three  kinds  of  property : 

1.  The  property  which  each  individual  should  enjoy 
in  his  own  faculties,  his  ideas  and  personal  activity,  imply^ 
ing  freedom  of  contract. 

2.  Personal  property,  which  is  the  possession  of 
material  wealth  capable  of  being  moved,  and  frequently 
of  being  multiplied  by  labor  with  the  aid  of  capital. 

3.  Real  property,  which  is  the  possession  of  a  portion 
of  the  soil,  and  which,  consequently,  is  limited  in  quantity. 

Property  of  all  kinds  is  derived  from  the  natural  rela- 
tions of  a  free  and  active  being  with  his  fellows  and  with 
passive  nature  and  may  exist  independently  of  human 
laws. 

Appropriation,  at  least  appropriation  of  certain 
material  objects  such  as  foodstuffs,  is  a  necessary  factor 
in  human  existence;  it  is  in  a  fashion  property  in  embryo. 

This  embryo  in  developing  becomes  collective  or  indi- 
vidual property.  Human  laws,  which  recognize  and 
protect  property  as  they  recognize  the  relations  of  labor 
and  protect  personal  liberty,  may  vary  according  to  the 


Distribution  of  Wealth  93 

degree  of  civilization  and  political  conditions.  Whilst 
submitting  to  the  universal  and  necessary  fact  of  the 
appropriation  of  nature  by  man,  they  may  favor  patri- 
archal property,  collective  property  of  tribe  or  state,  or 
individual  property.  By  an  abuse  of  the  principle,  the 
right  of  possession  has  been  extended  even  over  man  him- 
self and  slavery  established,  thus,  so  to  speak,  bringing 
two  rights  in  conflict,  placing  the  lower  above  the  higher, 
property  above  liberty,  whence  property  is  derived. 

Like  liberty,  and  all  the  rights  of  man,  property  has 
its  history.  From  that  history  are  drawn  the  following 
conclusions : 

1.  Law  everywhere  consecrates  property  and  defines 
its  rights,  thus  exercising  a  grand  influence  on  the  distri- 
bution of  wealth;  but  the  right  of  property,  derived 
naturally  from  the  economic  relations  of  man  and  matter, 
is  logically  anterior  to  law. 

2.  Respect  for  property  is  one  of  the  conditions,  and 
one  of  the  most  efficient  causes,  of  wealth. 

3.  In  a  general  way,  the  more  a  society  is  modified 
by  wealth,  by  instruction,  and  by  the  consciousness  of 
civil  and  political  rights,  in  other  words,  the  more  the 
individual  is  valued  in  a  society,  the  more  completely  does 
law  protect  the  various  manifestations  of  individual  liberty 
and  property.     This  is  the  course  of  civilization. 

It  has  been  said  that  property  is  founded  upon  utility. 
The  proposition  thus  stated  is  not  quite  accurate,  since  the 
true  philosophic  foundation  of  property  lies  in  the  free 
activity  of  the  individual  who  embodies  himself  in  a 
fashion  in  the  thing  appropriated.  It  is  quite  exact,  how- 
ever, to  say  that  the  idea  of  property  is  intimately 
connected  with  the  idea  of  utility.  Without  saving,  indi- 
viduals and  societies  would  be  plunged  in  hopeless  misery 


94  Elements  of  Political  Economy 

and  without  respect  for  property  there  would  be  little 
saving  or  none;  the  institution  of  property  is  then  mani- 
festly useful.  When  personal  interest  is  excited  in  a 
lively  manner  by  honorable  motives,  when  the  fruits  of 
labor  are  secure  in  the  hands  of  the  laborer,  when  the 
security  of  possession  is  complete,  man  is  most  disposed  to 
save ;  he  produces  and  accumulates  more,  enriches  himself, 
and  helps  to  enrich  those  who  have  relations  with  him. 
Here  again  we  behold  one  of  the  harmonies  between  the 
just  and  the  useful  such  as  the  philosopher  conceives  in 
general,  and  such  as  the  economist  establishes  by  the 
study  of  social  facts. 

43.  The  Right  to  Transmit  Property. — We  have 
said  that  the  right  to  dispose  implies  the  right  to  give: 
gift  is,  like  sale  and  consumption,  one  of  the  modes  of 
using  property.  He  who  cannot  give  to  the  needy  a 
piece  of  his  bread,  has  he  the  free  disposition  of  his  prop- 
erty ?  Now  in  this  respect  there  is  no  essential  difference 
between  a  piece  of  bread  and  a  chateau,  between  a  penny 
and  a  fortune :  the  right  is  the  same,  no  matter  what  the 
value  of  the  object.  There  can  be  but  few  exceptions  to 
this  rule,  exceptions  determined  by  special  laws  in  each 
country,  such  as  that  which  abridges  the  rights  of  the 
prodigal,  because  he  is  incapable  of  reason,  or  that  which 
forbids  the  husband  to  will  away  the  whole  of  his  property 
and  leave  the  wife  penniless. 

The  right  to  property  then  implies  the  right  to  give 
away  the  thing  possessed.  The  right  to  give  away  implies 
in  turn  the  right  to  bequeath.  It  is  vain  to  say  that  the 
dead  have  no  longer  any  rights.  The  testator  was  alive 
when  he  made  the  disposition,  and  it  is  only  the  execution 
of  his  wish  that  is  postponed  until  after  his  death.  The 
proprietor   transmits   his   rights   by  testament,    and    the 


Distribution  of  Wealth  95 

legatee  finds  himself  invested  with  them.  He  has  as  full 
and  legitimate  enjoyment  of  them  as  the  former  owner. 

If  the  deceased  has  left  no  will,  his  goods  naturally 
pass  to  his  family.  The  law,  whilst  differing  in  detail, 
prescribes  this  amongst  all  civilized  peoples.  Property 
must  have  an  owner,  and  in  default  of  special  designation 
it  is  logical  to  vest  it  in  those  who  are  bound  to  the  de- 
ceased by  a  close  community  of  origin.  It  is  only  in 
default  of  family  that  possessions  of  the  deceased  become 
the  property  of  the  state, 

44.  The  Communist  Criticism  of  Property. — Prop- 
erty has  its  adversaries.  Some  pretend  that  all  the  riches 
which  exist  in  nature,  or  which  are  produced  by  labor 
should  always  be  at  the  disposition  of  the  state  to 
be  distributed  to  each  according  to  his  needs  for  pro- 
duction or  consumption.  Others,  admitting  the  fairness 
of  personal  property  when  it  is  the  result  of  individual 
labor  and  saving,  attack  only  landed  property.  They 
declare  that  the  earth,  not  having  been  appropriated  in  the 
beginning,  cannot  in  the  course  of  time  become  the  object 
of  individual  ownership  without  that  appropriation  con- 
stituting a  fraud  and  a  prejudice  to  the  community  which 
has  thus  been  deprived  of  its  right  of  enjoyment.  These 
adversaries  belong  to  the  Socialist  school,  which  maintains 
that  wealth  should  be  administered  not  by  individuals, 
but  by  the  body  social,  and  especially  to  the  school  of  col- 
lectivists  or  communists,  who  are  thus  called  because  they 
want  all  property  to  be  held  in  common  and  to  belong  to 
the  citizens  collectively.  Further  on  we  shall  discuss 
these  doctrines  in  connection  with  the  distribution  of 
wealth :  it  suffices  here  to  consider  briefly  their  principal 
arguments  against  property. 


96  Elements  of  Political  Economy 

In  the  matter  of  personal  property,  would  it  not  be 
highly  unjust  to  rob  of  his  wealth  him  who  has  created  it 
by  his  labor  and  saving-,  and  likewise  unjust  to  rob  him  to 
whom  the  former  owner  has  transmitted  the  property? 
Such  a  violation  of  right  would  paralyze  the  productive 
energy  of  the  people,  who,  being  no  longer  able  to  count 
upon  the  fruits  of  their  labor,  would  be  no  longer  stimu- 
lated to  work;  and  while  aiming  at  the  welfare  of  the 
needy,  such  a  regime,  if  it  could  be  adopted  anywhere  out- 
side of  a  convent,  where  the  religious  faith  enjoins  self- 
denial,  would  cut  away  two  of  the  most  powerful  elements 
in  social  life,  vis. :  Liberty  and  Responsibility,  and  its  inev- 
itable result  would  be  to  promptly  pauperize  the  whole  of 
society. 

As  regards  real  property,  the  inconveniences  and  con- 
sequences of  such  a  regime  would  be  the  same. 

The  criticisms  upon  the  fairness  of  real  property  will 
not  bear  serious  examination. 

It  is  true  that  land  has  not  always  been  appropriated ; 
but  the  right  of  property  in  land  has  grown  with  the 
progress  of  civilization,  and  it  suffices  to  compare  the 
state  of  wealth  of  primitive  societies  with  that  of  modern 
societies  to  banish  all  desire  to  return  to  the  former  condi- 
tion. 

It  is  charged  that  the  occupation  of  land  has  been  an 
appropriation  of  the  productive  power  of  the  earth,  and 
that  property  of  this  sort  must  not  be  claimed  as  entirely 
the  fruit  of  labor.  This  is  true,  but  land  without  civiliza- 
tion is  by  itself  of  such  little  importance  that  few  men 
dream  of  going  out  to  appropriate  it  in  uninhabited 
regions  of  the  globe.  In  reality  most  land  has  absorbed 
in  amelioration  of  all  kinds  a  capital  far  greater  than  its 


Distribution  of  Wealth  97 

actual  value,  capital,  it  is  true,  of  which  much  has  been 
recovered  from  time  to  time  in  harvests. 

It  is  claimed  that  land  acquires  by  the  presence  of 
civilization  added  value  of  which  the  proprietor  alone 
gets  the  benefit,  although  the  community  is  the  cause  of  it. 
This  is  true  in  certain  cases.  But  how  can  we  estimate 
the  added  value  exactly,  and  separate  it  from  the  original 
value,  and  is  it  not  just  that  he  who  must  risk  lower  values 
should  likewise  get  the  benefit  of  added  values?  If  the 
institution  is  to  produce  beneficial  effects,  social  and 
economic,  property  must  be  clearly  defined,  and  he  who 
possesses  it  must  be  able  to  know  what  he  possesses.  This 
would  not  be  the  case  if  at  each  change  of  value  arising 
from  any  cause  whatsoever  a  piece  of  land  should  be  sub- 
ject to  re- valuation  and  the  possessor  compelled  to  divide 
his  possession  with  the  state. 

It  is  said  that  property  was  originally  the  result  of 
conquest  and  usurpation.  This  is  not  true  of  new  coun- 
tries, such  as  the  United  States,  nor  of  colonies  generally. 
If  it  is  true  of  lands  elsewhere,  we  must  bear  in  mind  that 
these  lands  have  long  since  changed  hands  by  sale  or  con- 
tract of  some  kind,  and  the  present  owners  hold  them  by 
the  same  right  as  all  other  property  which  they  have  pur- 
chased. If  individuals  are  excluded  from  holding  prop- 
erty on  this  account,  what  right  can  we  invoke  for  the 
state  which  has  gradually  established  itself  in  all  countries 
by  a  series  of  wars  and  revolutions?  It  is  the  duty  of 
society  to  enforce  respect  for  the  order  and  liberty  which 
interest  all  its  members.  Its  duty  to  maintain  order  gives 
it  the  right  to  tax  property  in  order  to  pay  the  expenses 
of  government,  to,  in  certain  cases,  regulate  the  use  and 
transmission  of  property,  and  to  even  take  it  forcibly  after 
allowing  a  proper  indemnity.     The  recognition  of  liberty 

7 


98  Elements  of  Political  Economy 

compels  the  government  to  respect  individual  property,  to 
which  in  principle  it  has  no  right  whatever. 

45.  The  Three  Factors  of  Production  Entitled  to 
Remuneration. — An  analysis  of  production  reveals  the 
fact  that  wealth  is  created  by  the  combined  action  of  labor, 
capital  and  nature;  that  the  forces  of  nature  which  are 
not  appropriated  render  gratuitous  service,  and  that  land, 
by  the  very  fact  of  being  appropriated,  belongs  to  the 
category  of  capital.  Labor  divides  itself  into  two 
classes  the  labor  of  the  wage-earner,  which  is  in  a  fashion 
the  renting  of  the  productive  force  of  a  man,  and  the  labor 
of  the  entrepreneur.  There  are  thus  three  factors  in 
production :  the  labor  of  the  wage-earner,  capital,  and  the 
labor  of  the  entrepreneur. 

If  all  three  lend  their  aid  in  creating  a  product,  if  that 
aid  is  voluntary  {i.  e.,  free  to  be  given  or  withheld,  or 
offered  elsewhere),  if  it  entails  anxiety,  effort  or  sacrifice, 
is  it  not  proper  that  all  three  should  share  in  the  utility 
produced  and  that  their  respective  share  should  be  propor- 
tional to  the  aid  given  ? 

Unless  they  did  share  in  the  product  they  would  ab- 
stain from  cooperating,  and  production  would  cease. 

Some  men  are  lazy  and  pass  their  lives  in  mediocrity 
or  misery ;  some  owe  their  inferiority  to  their  limited  in- 
telligence. There  are  nations  and  races  who  have  but 
little  energy  and  whose  intelligence  is  but  little  cultivated ; 
these  are  the  poor  races  and  nations.  To  each  according 
to  his  works :  this  is  the  consequence  of  human  responsi- 
bility and  is  the  general  principle  on  which  is  based  the 
distribution  of  wealth  produced  under  the  regime  of  free- 
dom of  contract. 

For  that  formula,  certain  writers  have  wished  to  sub- 
stitute this :     "To  each  according  to  his  needs,"  and  to 


Distribution  of  Wealth  99 

found  upon  this  latter  maxim  an  artificial  distribution. 
They  forget  that  frequently  the  only  limit  to  the  desires 
and  needs  of  man  is  the  impossibility  of  satisfying  them 
and  that  if  the  state  pretended  to  freely  supply  each  ac- 
cording to  his  needs,  each  would  be  among  the  largest 
consumers,  whilst  very  few  would  have  the  courage  and 
generosity  to  range  themselves  amongst  the  greatest 
workers.  The  national  wealth  would  rapidly  decline. 
If,  in  order  to  obviate  this  inconvenience,  the  state  should 
try  to  reduce  each  to  a  suitable  allowance,  it  would  only 
succeed  in  making  malcontents  and  would  commit  a  grave 
injustice  in  preventing  active  and  intelligent  men  from 
procuring  more  enjoyments.  In  this  field,  no  legal  com- 
bination can  take  the  place  of  a  regime  of  liberty. 

Resume 

Property  in  a  thing  is  the  right  to  use  and  dispose  of 
it.  It  is  saving  which  commonly  gives  rise  to  property. 
The  imprint  of  man's  personality  stamped  by  his  labor 
upon  matter  is  the  fundamental  source  of  property.  The 
fuller  the  recognition  of  the  individual  in  society,  the  more 
completely  do  the  laws  protect  individual  liberty  and 
property. 

The  right  of  property  implies  the  right  to  give  and  to 
bequeath  the  thing  possessed. 

The  objections  advanced  to  property  in  land  do  not 
bear  serious  examination. 

The  three  factors  in  production  are  the  labor  of  the 
wage-earner,  capital,  and  the  labor  of  the  entrepreneur. 

To  each  according  to  his  works;  this  is  the  grand  law 
of  the  distribution  of  wealth  under  the  regime  of  liberty. 


lOO  Elements  of  Political  Economy 

II 

THE  ROLE  OF  CAPITAL 

46.  Systems  Under  Which  Land  Is  Cultivated  and  the  Role  of 
Landed  Capital.  47.  The  Size  of  Farms.  48.  Small  Holdings.  49. 
The  Rent  of  Land.  50.  The  General  Theory  of  Rent.  51.  The 
Cooperation  of  Capital.  52.  Gratuitous  Credit  Impossible.  53.  The 
Rate  of  Interest.     54.  The  Conservation  of  Capital. 

46.  Systems  Under  Which  Land  is  Cultivated  and 
the  Role  of  Landed  Capital. — We  know  that  land,  with 
the  buildings  and  betterments  which  have  increased  its 
value,  is  fixed  capital. 

When  the  proprietor  cultivates  the  land  by  his  own 
labor  he  unites  in  his  person  the  triple  quality  of  landed 
capitalist,  laborer  and  entrepreneur,  and  if  he  realizes  any 
gains  he  appropriates  them  without  troubling  to  divide 
them  and  credit  each  of  these  three  factors  in  production. 
Such  a  division  would  not  take  place  unless  the  proprietor 
rented  his  land.  The  two  principal  modes  of  letting  farm- 
ing land  are  by  metayage  and  lease. 

Metayage  is  a  contract  by  which  the  proprietor  agrees 
to  furnish  the  land  and  necessary  materials  to  cultivate  it, 
taking  in  payment  a  certain  portion  of  the  products.  This 
is  the  ordinary'  method  of  letting  land  in  countries  whose 
inhabitants  are  poor.  It  may  be  practiced  by  a  farmer 
having  no  capital  of  his  own.  What  the  metayer  fur- 
nishes is  labor;  the  proprietor  furnishes  not  only  the  land 
and  buildings,  but  agricultural  implements,  cattle,  tools, 
etc.  It  is  proper  that  they  should  divide  the  fruits  of  this 
association.  The  word  "metayage"  would  indicate  that 
each  received  one-half,  though  this  rule  is  by  no  means 
invariable. 

If  agriculture  is  to  flourish,  the  soil  must  be  fertile,  or, 
if  only  moderately  fertile,  must  have  been  well  prepared 


Distribution  of  Wealth  loi 

by  previous  labor,  and  the  cultivator  must  be  intelligent 
and  command  sufficient  capital.  The  soil  is  never  prop- 
erly prepared  where  capital  is  lacking,  and  where  poverty 
reigns  the  people  in  general  have  but  few  means  of  devel- 
oping their  intelligence.  It  is  in  countries  where  such 
conditions  prevail  that  we  find  metayage.  The  objections 
to  the  system  are  that  it  curtails  the  free  action  of  the 
farmer  and  hampers  the  introduction  of  improved  proc- 
esses. On  the  other  hand,  where  the  nature  of  the  land 
calls  for  a  heavy  outlay  of  capital,  such,  for  example,  as 
irrigation  and  drainage,  or  costly  plantations,  metayage 
may  really  become  a  means  of  progress,  uniting  the 
requisites — intelligence,  capital  and  suitable  land. 

The  most  common  mode  of  letting  land  in  prosperous 
countries  is  by  lease.  A  lease  is  for  a  definite  time  and 
sum  and  has  distinct  advantages  over  metayage.  Under 
it  the  whole  of  the  profit  of  operating  the  farm  goes  to  the 
farmer,  strengthening  thereby  the  elements  of  personal 
interest.  It  is  a  system  which  can  be  practiced  only  by 
cultivators  possessing  a  capital  sufficient  to  stock  the  farm 
with  tools  and  cattle,  and  to  make  the  necessary  advances 
for  running  the  farm. 

Whether  through  metayage  or  lease,  whether  the  reve- 
nue is  variable  or  fixed,  whether  the  payment  is  in  kind 
or  in  money,  the  proprietor  receives  annually  a  certain 
sum  for  the  use  of  his  land.  This  sum,  when  the  propri- 
etor has  expended  no  capital  in  ameliorations,  represents 
the  share  due  to  land  in  distribution ;  it  is  called  rent.  Agri- 
cultural exploitations  must  then  be  divided  into  four  parts, 
of  which  the  first  two  are  subdivisions  of  capital,  viz.: — 
rent  for  the  land,  interest  for  capital,  wages  for  labor,  and 
the  profit  of  the  enterprise. 

47.     Size  of  Farms. — When   we   examine   the   agri- 


I02  Elements  of  Political  Economy 

cultural  systems  of  the  various  peoples  who  have  occupied 
the  globe  we  observe  that  the  size  of  farms  has  always  had 
an  intimate  connection  with  the  stage  of  civilization. 

Large  domains  are  necessary  to  a  life  of  hunting  and 
a  pastoral  life.  Savage  peoples  or  nomads  require  great 
areas  to  pasture  their  flocks,  and  still  larger  areas  if  they 
derive  their  support  from  hunting.  In  that  stage  of  so- 
ciety the  land  is  seldom  found  to  be  individual  property. 
It  is  more  often  the  collective  property  of  the  tribe  or 
family. 

Agricultural  life  may  accommodate  itself  to  large  or 
small  holdings. 

In  the  field  of  politics  it  may  be  said  that  there  is  an 
intimate  connection  between  large  holdings  and  an  aristo- 
cratic organization  of  the  state,  and  that  the  prevalence 
of  small  holdings  is  in  harmony  with  democratic  institu- 
tions. 

Under  the  feudal  system,  in  a  period  when  the  mind 
did  not  grasp  the  abstract  idea  of  the  state,  to  possess  land 
meant  not  only  to  be  a  proprietor  but  frequently  to  be 
sovereign.  Small  holdings  were  not  calculated  to  qualify 
a  man  to  play  this  latter  role;  this  is  why  almost  every- 
where large  holdings  prevailed.  The  latter  even  appeared 
indispensable  to  the  maintenance  of  an  aristocracy  and 
the  customs  of  the  Middle  Ages  accordingly  protected 
them  against  parcellation.  This  likewise  explains  why 
large  holdings  still  prevail  in  England,  where  the  social 
revolution  was  accomplished  gradually  without  despoiling 
the  upper  classes. 

Small  holdings,  which  conduce  more  to  the  welfare 
and  independence  of  a  large  number  of  individuals,  attach 
individuals    to  the  soil  and  interest  them  in  the  mainte- 


Distribution  of  Wealth  103 

nance  of  the  established  order ;  they  lend  to  the  safety  and 
stability  of  society. 

Turning  to  the  economic  aspect,  it  may  be  said  in  gen- 
eral : 

1.  That  large  holdings  procure  a  large  revenue  for  a 
small  number  of  persons. 

2.  That  small  holdings  by  yielding  a  larger  gross 
product,  support  greater  numbers. 

Leaving  out  of  consideration  the  industrial  resources 
of  the  country,  we  find  the  greatest  number  of  busy  hands 
where  small  holdings  prevail ;  each  must  go  back  to  his 
plow  or  hoe  until  he  has  made  his  small  plot  yield  a  sub- 
sistence for  his  family.  When  the  small  proprietor,  with 
the  aid  of  his  family,  cultivates  his  own  field,  the  senti- 
ment of  personal  interest  fills  the  family  with  an  energy 
which  sometimes  gives  better  results  than  the  improved 
processes  of  extensive  cultivation. 

It  is  assuredly  no  life  of  leisure  that  small  holdings 
oflfer.  Sometimes  it  is  a  life  of  hard  labor  for  petty  re- 
sults. It  often  happens  that  a  man  could  take  care  of 
twice  as  large  a  plot,  and,  provided  he  had  better  animals 
and  better  tools,  arrive  at  much  greater  results  at  the  end 
of  the  year.  Again  the  plot  may  not  suffice  to  keep  a 
family  busy ;  thence  ensues  a  waste  unless  emigration  re- 
establishes an  equilibrim.  Moreover,  small  cultivators 
have  little  money,  insufficient  instruction,  and  a  feeble 
spirit  of  initiation.  They  vegetate  in  routine  and  poverty 
without  the  knowledge  and  ability  to  increase  the  product 
of  their  land  by  the  adoption  of  improved  processes. 

But  this  unceasing  attack  upon  nature  compels  the 
earth  to  yield  its  utmost  taking  into  account  the  state  of 
knowledge  and  the  capital  of  the  cultivator.  The  net  prod- 
uct per  head  is  perhaps  feeble,  sometimes  even  nil,  ;'.  c, 


I04  Elements  of  Political  Economy 

each  consumes  all  he  produces,  but  nearly  always  the  gross 
product  under  the  regime  of  small  holdings  is  much 
greater  than  under  any  other. 

The  proprietor  of  a  large  estate  cultivates  it  with  the 
idea  not  so  much  of  forcing  it  to  yield  all  it  possibly  can 
as  to  derive  a  handsome  net  profit  from  his  operations.  If 
he  lacks  capital  he  will  fertilize  the  land  but  little  and  let 
certain  fields  lie  fallow,  waiting  upon  nature  to  restore 
what  the  crop  has  taken  from  the  soil.  Great  proprietors 
who  have  ample  capital  with  which  to  procure  the  latest 
implements  and  who  follow  the  best  methods  may,  of 
course,  obtain  both  a  large  gross  product  and  a  handsome 
profit,  but  these  are  the  exception. 

In  the  above  discussion  we  said  :  "Leaving  out  of  con- 
sideration the  industrial  resources."  In  reality,  industry 
creates  centers  of  consumption  whose  influence  upon  the 
population  and  upon  the  agricultural  production  of  a 
territory  is  quite  superior  to  that  of  any  system  of  hold- 
ings ;  thus  regions  of  small  holdings  but  of  little  industry 
are  often  less  peopled  and  yield  a  smaller  harvest  than 
countries  of  moderate  and  large  holdings  which  conduct 
manufactories. 

Truck  gardening,  which  is  practiced  around  great  cen- 
ters of  consumption,  and  which  the  railways  enable  men  to 
carry  on  at  a  distance  from  the  cities  in  suitable  climates, 
is  of  all  cultures  that  which  calls  for  the  greatest  number 
of  workers,  and  which  yields  the  largest  net  as  well  as  the 
largest  gross  product. 

The  size  of  holdings,  which  is  an  economic  phenome- 
non, is  determined  by  special  conditions,  economic  as  well 
as  the  political.  Among  such  conditions  are  the  configura- 
tion and  nature  of  the  soil,  the  demands  of  the  market,  and 
the  capital  required.    In  vast  plains  of  uniformly  good  soil 


Distribution  of  Wealth  105 

we  find  large  holdings  prevailing,  and  in  mountainous 
countries,  or  in  the  neighborhood  of  great  cities  where 
truck  gardening  is  carried  on,  we  find  the  land  more  di- 
vided. 

48.  Small  Holdings. — In  France,  where  the  agricul- 
tural population  still  forms  a  majority  of  the  inhabitants, 
small  holdings  prevail.  In  many  provinces  they  already 
existed  under  the  old  regime.  The  revolution  of  1789, 
which  emancipated  the  small  proprietor,  was,  so  to  speak, 
his  day  of  triumph.  The  "Code  Civile"  by  decreeing  an 
equal  division  between  the  children  in  the  absence  of  a 
will  and  by  limiting  the  portion  which  the  parent  might 
dispose  of  even  by  will,  has  contributed  to  the  mainte- 
nance of  small  holdings.  It  has  been  shown  that  the  net 
product  of  small  holdings  in  France  is  greater  per  acre 
than  that  of  large  holdings. 

How  is  land  made  to  yield  a  utility,  i.  e.,  how  is  it 
made  valuable?  By  labor  and  capital.  The  best  eco- 
nomic system  is  accordingly  that  which  opens  the  way 
most  freely  to  these  two  instruments.  The  former  is  best 
supplied  by  a  regime  of  small  holdings,  the  latter  by  mod- 
erate or  large  holdings,  when  there  is  freely  expended  on 
them  savings  derived  from  other  sources,  such  as  indus- 
try. A  regime  of  liberty  whilst  permitting  the  rich  capi- 
talist to  gather  small  farms  into  a  single  estate,  at  the  same 
time,  tends  to  divide  large  estates  when  their  yield  is  poor, 
and  substitutes  for  them  small  proprietors  who  get  more 
out  of  each  plot.  It  likewise  leads  to  small  holdings  in 
cases  where  the  culture  calls  for  considerable  labor,  as  in 
vineyards  and  truck  gardens.  Large,  moderate,  and  small 
holdings,  have  each  their  advantages  and  their  inconve- 
niences. The  economy  of  agriculture  demands  that  they 
should  adapt  themselves  in  each  locality  to  the  natural  con- 


io6  Elements  of  Political  Economy 

ditions  of  soil  and  climate,  and  to  social  conditions,  such 
as  capital,  state  of  knowledge,  and  the  markets. 

From  the  standpoint  of  political  economy  the  best  di- 
vision of  property  and  the  best  agricultural  methods  are 
those  which  result  from  an  absence  of  legal  restriction. 

49.  The  Rent  of  Land. — Ricardo  writing  at  the  be- 
ginning of  the  nineteenth  century  has  given  his  name  to  a 
theory  of  rent  which  earlier  writers  had  however  sug- 
gested. "Rent,"  says  he,  "is  that  portion  of  the  product 
of  land  which  one  pays  to  the  owner  for  the  enjoyment  of 
the  right  to  use  the  productive  and  imperishable  qualities 
of  the  soil." 

The  theory  is  this :  Men  commence  by  cultivating  the 
most  productive  lands  and  so  long  as  these  are  sufficient 
to  produce  what  is  needed  for  consumption,  there  is  no 
rent.  When  the  increase  of  population  renders  them  in- 
sufficient, the  cultivator  must  take  up  less  productive  lands 
and  consumers  will  pay  for  wheat  a  price  which  corre- 
sponds to  the  price  of  production  on  these  latter.  This  in- 
crease in  the  price  of  wheat  is  realized  by  the  cultivators 
of  the  first  lands  who  now  enjoy  an  extra  profit,  which  is 
rent.  When  further  increase  of  population  has  brought 
about  the  cultivation  of  lands  still  less  fertile,  the  price  of 
wheat  is  further  advanced.  Rent  has  then  commenced 
on  lands  of  the  second  quality,  and  that  of  the  first  quality 
of  land  has  increased. 

This  observation  of  Ricardo  is  true.  The  phenomenon 
of  rent  on  the  poorest  quality  of  land  cultivated  is  gener- 
ally due  to  the  cooperation  of  capital  in  the  exploitation 
of  the  land  and  does  not  refute  the  theory.  It  was  in  vain 
that  certain  economists,  such  as  Bastiat  in  France,  and 
Carey  in  America,  sought  to  overthrow  this  theory.  The 
first  tried  to  prove  that  land  has  no  value  except  that  which 


Distribution  of  Wealth  107 

man's  labor  and  capital  give  it,  and  that  like  all  natural 
agents,  it  offers  its  productive  powers  gratuitously.  The 
second  sought  to  show  by  examples  taken  from  the  settle- 
ment of  his  own  country  that  the  most  fertile  lands  are 
not  ordinarily  the  first  that  man  cultivates  because  they 
are  often  situated  in  river  bottoms,  which  call  for  consid- 
erable preparatory  work  and  consequently  a  certain  de- 
gree of  civilization  to  make  them  habitable.  These  argu- 
ments were  vain. 

Undoubtedly  capital  improves  the  soil,  and  it  is  often 
impossible  to  disengage  the  two  elements  in  valuing  a  piece 
of  land.  It  is  none  the  less  true  that  land  has  a  productive 
power  of  its  own,  that  that  power  is  not  the  same  for  all 
lands  nor  for  all  purposes,  and  that  it  is  necessary  to  value 
it  in  the  measure  of  the  utility  it  yields.  At  a  given  time 
there  are  always  lands,  as  Roscher  has  remarked,  which 
with  the  same  expenditure  of  capital  and  labor  yield  more 
than  others.  The  difference  existing  between  the  yield 
of  the  best  and  that  of  the  poorest  land  constitutes  rent. 

Bastiat  sought  to  prove  that  land  differs  in  nowise 
from  other  forms  of  capital,  and  that  its  value  emanated 
entirely  from  man's  labor.  He  thought  by  this  theory 
to  fortify  the  right  to  property.  His  proposition  contains 
an  element  of  truth  but  it  is  not  exact.  Although  there 
is  on  the  globe  plenty  of  land  which  has  no  value  because 
civilized  man  is  not  there  to  make  it  productive,  it  often 
happens  that  a  plot  of  land  acquires  additional  value  with- 
out the  expenditure  of  any  capital  or  labor  on  the  part  of 
its  owner.  This  takes  place,  for  example,  when  land 
which  has  been  inaccessible,  is  pierced  by  a  railway,  giv- 
ing it  access  to  an  important  market,  or  when  a  new  street 
is  cut  through  a  city,  giving  new  value  to  the  land  on  it. 

It  is  not  only  for  the  wheat  field  that  rent  is  paid. 


io8  Elements  of  Political  Economy 

The  wind  blows  for  everybody  but  of  two  windmills  con- 
structed exactly  in  the  same  fashion  and  at  an  equal  cost, 
one  placed  on  an  eminence  and  the  other  in  a  hollow,  the 
first  may  command  a  rent  and  the  second  perhaps  none. 

It  is  clear  likewise  that  rent  does  not  necessarily  add 
to  the  price  of  things;  it  is  the  consequence  and  not  the 
cause  of  advance  in  price,  as  we  have  seen  in  the  case  of 
the  second  and  third  quality  of  land  brought  into  cultiva- 
tion. It  cannot  be  charged  with  injuring  the  interests  of 
the  consumer.  In  certain  cases  it  is  even  beneficial  to  the 
consumer. 

Although  Ricardo's  theory  is  true,  certain  conse- 
quences which  he  has  sought  to  deduce  from  it  and  which 
have  alarmed  other  economists,  are  not  strictly  true,  or 
are  less  formidable  than  he  would  lead  us  to  believe. 

Ricardo  reasoned  as  follows  :  The  rise  in  rent  as  popu- 
lation increases  is  due  to  the  rise  in  wheat.  If  now  wages 
remain  stationary  whilst  the  workman  pays  more  for  his 
bread,  the  poor  will  grow  poorer  and  the  rich  richer.  In 
order  that  this  proposition  should  conform  to  the  actual 
state  of  things  it  would  be  necessary  to  presume  that  dur- 
ing this  evolution  of  rent  no  progress  had  been  made  either 
in  agriculture  or  industry,  because  agricultural  progress 
would  have  lowered  the  price  of  wheat  and  industrial 
progress  would  have  increased  wages.  Experience  since 
his  day  has  not  confirmed  this  theory  of  Ricardo.  In 
most  civilized  countries  there  has  been  simultaneously  ag- 
ricultural progress  resulting  in  more  abundant  harvests, 
commercial  progress  facilitating  the  exchange  of  products, 
and  industrial  progress  rendering  the  workman's  labor 
more  productive.  In  short,  what  has  happened  is  that  the 
price  of  wheat  has  remained  stationary  while  wages  have 
increased. 


Distribution  of  Wealth  109 

At  the  same  time,  rent  increased  generally  in  Europe 
and  in  America  during  the  first  three-quarters  of  the  nine- 
teenth century. 

Causes  which  lead  to  an  increase  of  rent  in  one  region 
sometimes  produce  a  decrease  in  another;  thus  lands 
which  enjoy  the  privilege  of  supporting  great  centers  of 
population  suffer  from  the  advent  of  railways,  which  open 
the  market  and  bring  higher  rents  to  new  lands.  These 
latter  have  in  turn  witnessed  their  rent  reduced  by  new  ex- 
tensions of  the  railways,  bringing  the  products  of  more 
distant  lands  into  competition.  This  is  the  effect  pro- 
duced in  Europe  during  the  last  quarter  of  a  century  by 
the  competition  of  America  and  India. 

50.  The  General  Theory  of  Rent. — As  we  have  said, 
it  is  not  only  the  wheat  field  which  alone  enjoys  the  privi- 
lege of  rent;  building  lots  and  mineral  lands,  likewise 
command  it.  This  is  still  saying  far  too  little,  the  phe- 
nomenon of  rent  being  much  more  general. 

Rent  is  really  enjoyed  by  every  instrument  of  produc- 
tion and  every  worker  having  any  natural  superiority 
whatever  in  production  over  other  instruments  or  other 
workers.  The  occupant  of  a  shop  on  a  busy  corner  does 
more  business  than  competitors  located  in  adjoining 
streets.  If  he  rents  the  shop  he  probably  surrenders  a  por- 
tion of  his  advantage  in  a  rent  higher  than  that  paid  by 
others. 

A  farmer  raises  several  horses  which  consume  the 
same  quantity  of  fodder.  He  discovers  one  which  is 
stronger  and  possesses  more  endurance  than  others  and 
uses  it  for  heavy  wagons  and  important  work ;  here  again 
is  a  phenomenon  of  rent. 

A  lawyer  possesses  a  remarkable  talent  for  pleading 
and  an  unusual  acuteness  of  mind.     He  studies  no  harder 


no  Elements  of  Political  Economy 

at  school  than  others,  and  now  spends  no  more  time  than 
others  in  preparing  his  brief;  nevertheless  business  flows 
to  his  office  although  his  fees  are  higher  than  those  of  his 
fellows,  and  he  is  in  the  way  of  building  up  a  large  for- 
tune.    This  is  rent. 

The  physical  strength  and  stature  which  qualify  a  man 
for  police  duty  and  enable  him  to  command  better  wages 
than  others  who  have  the  same  mental  endowments  or 
skill  is  likewise  a  rent.  Advantage  from  superior  natural 
endowments  of  any  kind  is  rent. 

None  of  these  forms  of  rent  weigh  upon  the  consumer. 
The  merchant  does  not  sell  his  wares  dearer,  the  price  of 
the  things  produced  by  the  clever  workman  are  no  higher, 
and  the  clients  who  have  the  liberty  of  choosing  their  law- 
yers no  doubt  see  an  advantage  in  selecting  a  particular 
lawyer  notwithstanding  his  high  charges. 

On  the  contrary,  all  are  in  the  nature  of  additional  serv- 
ices rendered  to  society  by  the  instrument  or  worker,  and 
society  is  the  gainer.  Its  interest  is  to  have  these  quali- 
ties multiplied.  What  happens  when  their  number  is 
greatly  increased  ?  These  superior  qualities  compete  with 
one  another,  the  price  of  their  services  is  lowered,  and  as 
they  produce  more  with  a  given  effort,  there  results  a  dis- 
tinct gain  for  society.  This  means  lower  prices  and  lower 
rent ;  that  is,  a  result  quite  opposite  to  the  hypothesis  which 
alarmed  Ricardo. 

51  The  Cooperation  of  Capital. — It  is  absolutely 
necessary  for  production  that  labor  and  capital  be  associ- 
ated. This  we  have  already  demonstrated  in  treating  of 
capital. 

Under  what  conditions  does  this  association  take 
place?    They  differ  according  to  circumstances,  but  they 


Distribution  of  Wealth  ill 

all  involve  a  division  of  the  product,  because  both  ele- 
ments have  participated  in  the  work  of  production. 

An  elementary  example  is  that  of  Capital  and  Labor 
united  in  the  same  person;  here  the  worker  labors  with 
tools  and  upon  raw  material  already  his.  But  this  is  not 
the  simplest  example  from  the  standpoint  of  scientific 
analysis.  The  two  factors  of  production  are  here  so  inti- 
mately combined  that  one  is  not  always  careful  to  distin- 
guish between  them.  The  cobbler  manages  to  support 
himself,  pays  a  rent  for  his  stall,  and  possesses  a  small  in- 
dustrial plant,  i.  e.,  he  works  with  a  small  capital.  Does 
he  think  of  allotting  to  capital  a  distinct  part  of  his  earn- 
ings? Hardly,  he  thinks  only  of  earning  a  livelihood. 
Nevertheless  if  he  cedes  his  material  and  his  custom  for  a 
time  to  a  comrade,  he  knows  very  well  that  all  this  has  a 
value.  He  demands  for  it  a  certain  amount  of  money. 
The  element  Capital  emerges. 

Two  weavers  off  in  the  country  pursue  their  labors, 
one  with  his  own  loom,  the  other  with  a  loom  belonging  to 
a  manufacturer  in  a  neighboring  town.  The  first  receives 
the  whole  reward  of  making  the  cloth,  the  second  receives 
a  smaller  reward,  the  manufacturer  retaining  something 
for  the  use  of  his  capital.  The  influence  of  capital  is  here 
still  more  manifest. 

It  becomes  quite  clear  when  the  manufacturer  employs 
workmen  and  has  an  organized  establishment.  (See  par. 
1 8  and  24). 

For  this  valuable  cooperation  which  augments  so 
largely  the  productive  power  of  labor  it  is  quite  just  to  pay 
something.  Like  every  partner  it  has  its  right  to  its  share. 
52.  Gratuitous  Credit  Utopian. — We  must  reward 
capital  just  as  we  reward  labor.  A  friend  may  lend  money 
without  interest,  just  as  he  might  render  us  a  service  with- 


112  Elements  of  Political  Economy 

out  charge,  or  present  us  with  some  product  of  his  labor. 
These  are  acts  inspired  by  sympathy,  and  not  such  as  regu- 
late economic  activity.  In  the  ordinary  relations  of  life, 
men  exchange  services.  "I  need  your  capital,"  says  the 
worker;  "with  it  I  can  produce  more."  "Here  it  is,"  an- 
swers the  capitalist,  "now  what  part  of  the  product  will 
you  reserve  for  it?"  Whether  he  himself  imposes  the  con- 
ditions, or  waits  upon  the  borrower  to  suggest  them,  he 
will  not  surrender  his  money  except  in  the  hope  of  reason- 
able profit.  If  the  borrower  offers  less  than  his  neighbor, 
the  capitalist  will  probably  lend  to  the  neighbor,  provided 
there  be  equal  security. 

What  would  happen  if  all  borrowers,  imbued  with  the 
idea  that  the  capitalists  were  abusing  their  position  in 
claiming  a  part  of  the  profit,  should  refuse  to  surrender 
any  of  the  profit?  Capitalists  would  keep  their  money. 
The  more  sensible  among  them  would  themselves  embark 
in  enterprises  in  order  to  use  the  instrument  which  they 
could  not  lend  out  profitably.  Others  would  consume 
their  capital  in  an  unproductive  manner,  preferring  present 
enjoyment  to  a  self-denial  which  yielded  nothing. 

We  must  never  forget  that  the  source  of  capital  is  sav- 
ing, and  that  saving  is  abstaining  from  enjoyment.  Now 
the  man  of  foresight  denies  himself  at  present  only  for  the 
sake  of  future  enjoyment,  enjoyment  either  for  himself  or 
for  his  family.  Suppress  the  right  of  future  enjoyment, 
i.  e.,  the  profit  of  capital  loaned  out,  and  you  at  the  same 
time  suppress  saving. 

In  such  matters  men  are  governed  by  their  interests. 
As  the  interest  of  workers  to  secure  capital  is  not  less  pat- 
ent and  pressing  than  the  interest  of  capitalists  to  find  em- 
ployment for  their  capital,  an  agreement  necessarily  fol- 
lows, despite  all  barriers  which  unwise  laws  may  erect. 


Distribution  of  Wealth  113 

53.  The  Rate  of  Interest. — Capital,  like  all  values, 
is  subject  to  the  law  of  offer  and  demand.  Its  rate  of  re- 
muneration is  determined  by  the  point  of  accord  between 
the  capitalist,  who  seeks  the  greatest  possible  profit,  and 
the  borrower,  who  seeks  the  least  expense.  To  say  that 
capital  is  scarce  is  to  say  that  it  is  dear,  i.  e.,  the  rate  of  in- 
terest is  high ;  vice  versa,  abundant  capital  means  cheap 
capital,  i.  e.,  low  interest. 

Interest  is  regulated  principally :  First,  by  the  general 
state  of  social  wealth  which  tends  to  lower  the  rate  as  that 
wealth  becomes  greater.  Second,  by  the  activity  of  enter- 
prise and  the  productivity  of  capital  which  tend  to  raise 
interest  according  as  they  themselves  are  greater. 

We  may  compare  this  play  of  the  rate  of  interest  to  the 
movement  of  a  balance.  In  the  scale  of  offer  place  addi- 
tional capital ;  immediately  the  beam  descends.  But  place 
new  borrowers  or  large  profits  in  the  scale  of  demand  and 
it  readjusts  itself.  Each  oscillation  marks  not  the  absolute 
quantity  of  valuable  capital  but  the  relation  between  that 
quantity  and  demand. 

This  is  why  we  see  interest  lower  in  periods  of  com- 
mercial depression.  It  is  not  because  at  such  times  there 
is  more  capital,  but  because  it  is  less  in  demand.  To-day, 
because  of  the  abundance  of  capital,  there  is  in  nearly  all 
civilized  countries  a  tendency  towards  lower  interest. 

It  follows  from  this  reasoning  that  although  low  in- 
terest is  desirable  and  possible,  the  actual  estimation  of  in- 
terest is  impossible.  Reason  and  facts  both  contradict  such 
a  supposition.  That  which  is  desirable  is  that  there  should 
be  a  large  amount  of  capital,  and  that  it  at  the  same  time 
should  be  much  in  demand.  This  means  many  instruments 
of  production  at  the  disposition  of  human  industry,  and 
these  instruments  constantly  employed.     These  two  condi- 

8 


114  Elements  of  Political  Economy 

tions  help  to  realize  the  end  of  economic  effort.  If  too 
high,  interest  hampers  production ;  if  too  low,  it  ceases  to 
encourage  the  formation  of  capital.  The  proper  amount 
can  never  be  determined  arbitrarily  because  it  varies  ac- 
cording to  circumstances,  place  and  time. 

When  capital  is  associated,  or  invested,  there  is  oppor- 
tunity of  great  profit  and  risk  of  serious  loss.  If  the 
undertaking  is  successful,  a  very  high  profit  may  be  real- 
ized. If  unfortunate,  not  only  is  there  no  profit,  but  the 
capital  itself  may  be  partly  or  wholly  destroyed  and  the 
capitalist  loses  both  interest  and  principal. 

The  lender  may  in  a  measure  guard  against  these  risks. 
In  place  of  a  revenue  proportional  to  the  profits  of  the 
year,  he  may  agree  in  advance  upon  a  fixed  revenue  based 
on  the  approximate  annual  profits  of  the  enterprise  or  fixed 
by  the  market  value  of  capital.  In  this  case  the  money  he 
furnishes  does  not  take  the  form  of  associated,  or  invested, 
capital,  but  of  hired  capital.  Every  year  the  lender  will 
receive  a  stipulated  interest,  say,  for  example,  5  per  cent. 
If  the  borrower  has  realized  large  profits  so  much  the 
better  for  him;  they  are  all  his  after  he  has  once  paid  the 
interest  agreed  upon.  If,  on  the  other  hand,  his  profit  is 
only  4  per  cent.,  he  makes  good  the  extra  i  per  cent,  from 
his  own  capital,  and  will  suffer  a  loss.  Capital  which  is 
loaned  runs  a  risk  of  loss  only  in  the  event  of  the  enterprise 
turning  out  so  badly  that  the  losses  consume  the  whole 
capital  of  the  borrower,  and  a  part  of  the  borrowed  funds 
as  well. 

Accordingly  loanable  capital  makes  its  own  choice  and 
lays  down  its  conditions  according  to  the  risk. 

Circulating  capital  may  be  loaned  under  different 
forms :  in  the  form  of  cash  ready  to  be  employed  at  the 
pleasure  of  the  borrower,  in  instruments  of  production,  or 


Distribution  of  Wealth  115 

merchandise,  or  in  the  form  of  a  credit  at  a  bank,  etc. 
Each  of  these  forms  influences  the  rate  of  interest  and  the 
conditions  of  the  loan. 

54.  The  Conservation  of  Capital. — The  position  of 
the  capitalist  is  certainly  one  of  greater  ease  and  is  more 
agreeable  than  that  of  the  workman  who  must  earn  his 
bread  from  day  to  day.  But  the  successful  management 
of  capital  is  by  no  means  a  sinecure;  it  presupposes  a  qual- 
ity which  is  not  so  common  as  generally  imagined.  One 
economist  thought  that  the  function  of  the  capitalist  might 
be  designated  as  "The  Work  of  Saving,"  but  this  is  hardly 
a  proper  term  because  saving  consists  rather  in  an  effort 
of  abstention  than  in  action. 

The  capitalist  should  first  of  all  possess  the  virtue  of 
saving.  It  is  his  effort  of  abstention  which  results  in  sav- 
ing a  portion  of  his  revenue  and  conserving  the  capital 
which  has  been  previously  created  by  his  own  labor  or 
which  has  been  received  as  a  heritage.  Not  all  owners  of 
capital  know  how  to  make  this  effort. 

It  is  much  not  to  waste  one's  substance  in  prodigality, 
but  this  is  not  all  that  is  demanded ;  one  should  know  how 
to  administer  his  estate.  If  it  is  realty  it  is  important  not 
only  to  keep  it  up  by  necessary  repairs,  but  to  know  how 
to  increase  its  value  by  judicious  improvements.  If  per- 
sonalty, the  important  thing  is  not  to  be  led  into  bad  in- 
vestments by  the  deceptive  prospect  of  gain,  and  to  esti- 
mate correctly  the  morality  and  capacity  of  people  with 
whom  we  deal. 

Whatever  the  cause  of  destruction  of  capital,  prodigal- 
ity or  non-success,  society  suffers  a  loss  by  it,  since  abun- 
dance of  capital  is  profitable  to  society.  On  the  other  hand 
it  derives  a  benefit  from  the  sole  fact  of  the  conservation  of 
capital  by  its  owner. 


ii6  Elements  of  Political  Economy 

Resume 

Metayage  is  a  contract  by  which  the  proprietor  fur- 
nishes the  land  and  the  material  for  its  exploitation  in  con- 
sideration of  a  definite  share  in  the  products.  Lease  is  a 
contract  under  which  the  proprietor  lets  his  land  for  a 
given  time  and  sum.  The  price  paid  for  the  use  of  the 
land  (when  the  proprietor  has  expended  nothing  for  im- 
provements) is  the  rent  or  the  share  due  the  land  in  dis- 
tribution. 

Relative  advantages  of  large  or  small  estates  is  a  mat- 
ter of  epoch  or  place. 

Large  estates  bring  large  revenue  to  a  small  number 
of  persons.  There  is  an  intimate  connection  between 
large  holdings  and  an  aristocratic  organization  of  the 
state. 

Small  holdings,  yielding  a  larger  gross  profit,  feed  a 
greater  number  of  men.  The  prevalence  of  small  holdings 
is  in  harmony  with  democratic  institutions. 

From  the  standpoint  of  political  economy  the  best  di- 
vision of  property,  like  the  best  use  of  the  soil,  is  that  which 
results  from  absence  of  legal  restrictions. 

Rent  is,  in  theory,  that  portion  of  the  product  of  land 
which  one  pays  to  the  owner  for  the  right  to  use  the  pro- 
ductive and  imperishable  qualities  of  the  soil.  At  a  given 
time  there  are  always  some  lands  which,  with  a  like  ex- 
penditure of  capital  and  labor,  yield  more  than  others; 
the  difference  between  the  yield  of  the  most  favored  and 
the  least  favored  constitutes  rent.  Rent  is  the  consequence 
and  not  the  cause  of  a  rise  of  prices. 

When  instruments  of  production  or  workers  have  any 
natural  superiority  whatever  in  production  they  may  be 
said  to  enjoy  a  rent.    The  origin  of  all  phenomena  of  rent 


Distribution  of  Wealth  117 

lies  in  the  additional  service  to  society  rendered  by  an  in- 
strument or  worker.  Capital  is  entitled  to  payment  for  its 
cooperation.     Gratuitous  credit  is  Utopian. 

Capital  rare  is  synonomous  with  capital  dear  or  a  high 
rate  of  interest,  capital  abundant  with  capital  cheap,  or  a 
low  rate  of  interest. 

The  rate  of  interest  is  generally  proportioned  to  the 
risk. 

Society  derives  a  benefit  from  the  sole  fact  of  the  con- 
servation of  capital  by  its  owner. 

Ill 

THE  PROFIT  OF  THE  ENTREPRENEUR 
55.  The  Profit  of  Enterprise.    56.  The  Dividend. 

55.  The  Profit  of  Enterprise. — The  profit  of  enter- 
prise is  a  topic  quite  distinct  from  the  two  other  elements 
in  distribution.  Wages  and  the  remuneration  of  capital, 
either  as  rent  or  interest,  are  a  part  of  the  expenses  of  the 
enterprise.  Together  with  the  raw  material  employed  and 
a  portion  of  the  general  expenses,  they  constitute  the  cost 
of  production ;  the  profit  is  the  gain  derived  from  the  oper- 
ation. 

All  except  profit  are  necessary  preliminary  factors  de- 
termined in  advance;  they  are  often  paid  before  the  sale, 
and  frequently  before  the  completion  of  the  product,  since 
labor  and  capital  are  consumed  in  its  fabrication.  Profit 
is  contingent  and  uncertain  and  comes  into  existence,  if 
at  all,  only  at  the  moment  when  the  product  is  sold,  or 
rather  when  the  purchaser  pays  for  it.  It  is  only  then  that 
the  entrepreneur  can  calculate  precisely  the  excess  of  sell- 
ing price  over  cost,  i.  e.,  over  the  total  sum  expended  as 
wages,  capital  and  interest.  This  excess  is  the  profit  of  the 
enterprise. 


Ii8  Elements  of  Political  Economy 

When  one  reflects  on  the  number  of  enterprises,  large 
and  small,  which  are  constantly  undertaken  in  a  vigorous 
society,  on  the  amount  of  capital  involved,  how  easily  it  is 
impaired  or  quite  lost,  one  realizes  the  responsibility  that 
rests  upon  the  entrepreneur.  Large  profits  are  but  com- 
pensation for  numerous  inadequate  profits  and  for  losses. 

Although  the  position  of  the  entrepreneur  brings 
greater  opportunity  than  that  of  the  wage-earner,  it  is  at 
the  same  time  surrounded  with  perils.  Ordinarily  he 
amasses  sufficient  to  support  him  in  his  old  age  only  after 
long,  persevering  labor,  backed  by  proper  economy.  A 
stroke  of  luck  may  bring  riches  to  an  individual  suddenly, 
but  from  the  standpoint  of  morals  and  sound  political  econ- 
omy, it  is  bad  to  count  upon  getting  rich  in  such  fashion. 
New  countries  likewise  modify  the  rule  by  yielding  a  great 
gross  product  and  making  the  accumulation  of  wealth 
easier. 

What  ordinarily  keeps  down  profits  is  the  fact  that 
competition  acts  upon  them  just  as  it  acts  upon  the  rate  of 
interest.  If  profits  are  high  in  a  given  industry  large  num- 
bers immediately  seek  it,  fighting  for  customers  and  secur- 
ing them  only  by  lowering  prices ;  this  process  is  apt  to  go 
on  until  the  profit  of  this  industry  falls  to  the  average 
profit  of  other  industries. 

Whatever  the  proper  mean — an  impossible  thing  to 
fix — of  profits,  it  is  proper  that  it  should  be  superior  to  the 
average  wage.  There  are  two  reasons  for  this :  First, 
profit  is  the  recompense  of  a  responsibility  which  is  heavy 
because  of  the  penalties  of  non-success.  Second,  it  is  the 
remuneration  of  intellectual  labor  which  exercises  a  pre- 
ponderant action  on  the  results  obtained  in  production. 

Profits  are  moreover  subject  in  their  variations  to  the 
same  general  laws  as  wages  and  capital.    In  industries 


Distribution  of  Wealth  119 

where  competition  is  keen,  profits  are  moderate  because 
the  entrepreneurs  are  obliged  to  sell  cheap.  In  industries 
where  they  enjoy  an  absolute  or  approximate  monopoly, 
profits  may  be  higher.  In  industries  which  are  carried  on 
with  a  large  capital  the  total  profits  may  be  considerable, 
although  the  profit  on  each  article  is  small. 

The  total  profit  depends  much  on  the  personal  qualities 
of  the  entrepreneur.  One  man  grows  rich  in  an  industry 
in  which  his  neighbor  simply  manages  to  exist. 

56.  Dividend. — In  stock  companies  there  is  only  as- 
sociated capital.  Those  who  have  supplied  this  are  the 
entrepreneurs.  All  the  officers  employed  are  but  wage- 
earners.  It  is  to  capital  that  the  profits  belong.  It  re- 
ceives them  in  the  form  of  a  dividend. 

Dividend,  being  profit,  is  then  variable  and  uncertain. 

In  thus  becoming  associated,  capital  renounces  the  ad- 
vantage enjoyed  by  hired  capital,  i.  e.,  fixed  interest.  For 
it,  interest  and  profit  are  merged  in  dividend,  which  may 
be  large  when  the  enterprise  is  successful  and  nil  when  not 
successful.  A  portion  of  the  capital  of  a  company  may 
nevertheless  be  in  the  form  of  a  bonded  debt  on  which  the 
interest  is  not  variable  and  contingent  but  fixed.  Capital 
in  this  form  may  be  classed  as  hired  capital. 

It  follows  that  if  the  enterprise,  instead  of  showing  a 
profit,  has  suffered  a  loss,  and  comes  to  be  liquidated,  it 
is  the  capital  invested  in  shares,  or  the  associated  capital, 
which  sustains  this  loss,  whilst  the  capital  in  the  form  of  a 
bonded  debt  which  was  regarded  as  borrowed  capital,  and 
consequently  is  a  debt,  is  reimbursed  first. 

Ordinarily  the  whole  profits  are  not  paid  out  in  divi- 
dends but  a  part  is  set  aside  as  a  reserve.  This  mode  of 
distribution  does  not  change  the  nature  of  the  investment. 


/ 


120  Elements  of  Political  Economy 

The  reserve,  being  a  part  of  the  profits,  remains  the  prop- 
erty of  the  stockholders. 

Resume 

The  profit  of  an  enterprise  is  the  excess  of  selhng  price 
over  cost  of  production,  i.  e.,  over  the  total  sum  expended 
as  wages,  capital,  and  interest. 

Profit  is  essentially  variable  and  uncertain.  It  is 
proper  that  on  the  average  it  should  be  superior  to  wages, 
because,  first,  it  assumes  heavy  responsibilities  and  risk  of 
loss ;  second,  because  it  is  the  remuneration  of  intellectual 
labor.  Profit  is  generally  moderate  where  competition  is 
keen.  It  may  be  large  in  the  case  of  monopolies  or  where 
large  capital  is  embarked.  The  profit  of  associated  capital 
takes  the  form  of  a  dividend. 

IV 

THE  ROLE  OF  LABOR 

57.  The  Wage  System.  58.  Rate  of  Wages.  59.  Day  Labor  and 
Piece-Work,  and  the  Hours  of  Labor.  60.  Labor  Unions.  61. 
Profit-Sharing.  62.  Cooperative  Societies.  63.  Criticism  of  the 
Wage  System.     64.  Socialist  Doctrines  on  the  Distribution  of  Wealth. 

57.  The  Wage  System. — The  wage  system  is  a  sys- 
tem of  freedom  of  contract.  Bastiat  has  explained  the 
law  of  wages,  and  the  advantages  which  result  from  this 
system  of  labor,  by  a  striking  example. 

An  old  fisherman  remarks  one  day  to  his  comrade: 
"You  have  no  boat  and  no  nets,  nothing  but  your  hands 
with  which  to  fish,  and  you  run  the  risk  of  faring  badly. 
You  have  no  store  of  food  and  one  can't  work  long  on  an 
empty  stomach.  Come  with  me.  It  is  to  your  interest 
and  to  mine.  It  is  to  your  interest  because  I  will  surren- 
der to  you  a  part  of  our  catch,  and  no  matter  how  small 
this  may  be  it  will  probably  be  greater  than  any  you  could 


Distribution  of  Wealth  I2i 

make  alone.  It  is  to  my  interest  to  have  you  with  me  be- 
cause the  additional  catch  I  shall  make,  owing-  to  your 
help,  will  be  greater  than  what  I  give  you.  In  short  to 
unite  your  labor  and  my  capital  will  give  us  a  total  catch 
much  greater  than  if  we  each  fished  alone.  If  we  divide 
this  excess  the  association  will  be  of  advantage  to  both." 

They  carry  out  this  plan,  but  later  on  the  young  fisher- 
man prefers  to  receive  each  day  a  fixed  quantity  of  fish. 
His  uncertain  profit  is  thus  converted  into  wages  without 
the  advantages  of  association  being  destroyed,  and  with- 
out the  association  itself  being  dissolved.  We  have  here 
the  true  origin  of  wages. 

In  this  cooperation,  what  is  it  which  essentially  dis- 
tinguishes the  employer  and  the  employee?  It  is  capital 
and  the  responsibility  for  the  enterprise.  The  employer 
is  a  worker  who  at  his  own  risk  and  peril  undertakes  a 
certain  task  with  capital  which  either  belongs  to  him  or 
which  has  been  borrowed.  The  laborer  is  a  worker  who 
receives  out  of  the  capital  of  another  a  remuneration  called 
wages,  which  is  fixed  in  advance ;  this  remuneration  is  re- 
ceived for  executing  certain  work  with  the  aid  of  that 
other's  capital.  Wages  is  often  paid  before  the  comple- 
tion of  the  undertaking  and  nearly  always  before  the  sale 
of  the  product. 

The  employer  sells  his  products,  which  are  the  result 
of  labor  and  capital;  the  workman  sells  his  labor.  The 
wage  system  is  then  a  system  of  contract  for  the  hire  of 
labor.  Nevertheless  there  is  an  essential  difference  in  the 
manner  in  which  the  price  of  products  and  the  rate  of 
wages  are  fixed.  The  tendency  is  to  buy  products  at  the 
cost  of  production,  and  competition  causes  the  selling 
price  to  approach  the  cost  of  production.  It  is  well, 
since  consumption  gains  by  it.     On  the  other  hand,  the 


122  Elements  of  Political  Economy 

workman  bargains  over  the  question  of  his  wages,  and 
labor  tends  to  sell  itself  for  what  it  is  worth,  i.  e.,  to  ob- 
tain a  remuneration  equal  to  the  utility  it  creates;  that 
which  is  likewise  just  and  for  the  general  good. 

58.  The  Rate  of  Wages. — The  rate  of  wages,  i.  e., 
the  price  of  labor,  is  relatively  much  more  stable  than  the 
price  of  products.  This  is  a  truth  which  every  manufac- 
turer learns  by  experience.  The  manufacturer  makes  a 
profit  to-day  and  perhaps  loses  to-morrow.  By  the  side 
of  articles  which  he  can  sell  to  advantage  are  others  on 
which  he  must  reconcile  himself  to  a  loss,  because  the  price 
has  fallen  or  because  fashion  has  changed.  It  would  be 
impossible  to  make  the  wages  of  his  employees  follow 
these  variations.  The  wage  system,  which  represents  a 
mean  between  these  extremes  of  high  and  low  prices, 
between  these  gains  and  losses,  may  be  compared  not  only 
to  an  association  but  to  an  assurance  against  loss  in  the 
value  of  the  product.  The  wage  earner  gets  this  assur- 
ance in  exchange  for  renouncing  all  claims  to  high  profits 
which  the  sale  of  the  product  may  perhaps  yield. 

Though  less  variable  than  merchandise,  wages  are  not 
absolutely  fixed;  they  cannot  be.  Like  everything  of 
value,  they  are  subject  to  the  law  of  ofTer  and  demand. 

The  principal  causes  regulating  wages  are  the  follow- 
ing: 

I.  The  Degree  of  Productiveness  of  Labor. — When 
the  industry  in  which  the  wage  earner  is  a  co-worker 
yields  large  profits  his  share  may  be,  and  nearly  always  is, 
larger  than  in  industries  which  yield  small  profits.  The 
productivity  of  labor  itself  depends  upon  different  causes : 
On  the  nature  of  the  industry ;  on  the  effectiveness  of  the 
instruments  of  labor;  on  the  skill  of  the  workman,  and, 
likewise,  on  the  intelligent  direction  of  the  enterprise.     It 


Distribution  of  Wealth  123 

is  thus  that  in  the  United  States  and  in  new  countries 
where  profits  are  generally  high,  wages  and  the  interest 
on  capital  are  likewise  high.  This  fact  likewise  explains 
why  the  young  woman  who  operates  an  improved  loom 
enjoys  higher  wages  than  one  who  works  at  home  on  her 
old-fashioned  spinning-wheel;  she  produces  more  yarn. 
In  general  the  laborer  is  paid  not  because  he  labors  but 
because  he  produces,  and  in  consideration  of  what  he  pro- 
duces. Improved  machinery  tends  to  raise  wages  and 
high  wages  stimulate  improvements  in  machinery. 

2.  The  Amount  of  Wealth  in  the  Country. — We  may 
say  that  wages  are  high  when  capital  is  abundant,  meaning 
here  circulating  capital  from  which  the  wages  are  paid, 
and  which  the  economists  of  the  first  half  of  the  nine- 
teenth century  designated  as  "the  wage  fund."  This 
explains  the  fact  that  in  country  districts  where  there  is 
little  money  household  help  receive  less  than  in  richer  dis- 
tricts and  less  than  in  the  cities,  though  they  d,o  about  the 
same  amount  of  work  and  all  receive  their  maintenance  so 
that  they  are  not  compelled  to  regulate  their  wages  by  the 
cost  of  living.  It  likewise  explains  why  the  general  level  of 
wages  is  higher  in  rich  countries  than  in  poor  countries, 
higher  in  manufacturing  and  commercial  countries  than 
in  purely  agricultural  countries,  and  why  in  all  civilized 
countries  it  has  risen  in  the  nineteenth  century  with  the 
progress  of  wealth.  The  wages  of  domestics  have  almost 
doubled  in  the  last  half  century.  It  is  not  because  their 
labor  has  become  any  more  productive  nor  because  it  costs 
them  any  more  to  live,  but  because  their  masters  have 
more  to  spend. 

3.  Offer  and  Demand,  depending  upon  the  relation 
of  the  laboring  population,  which  constitutes  offer,  to  the 
volume  of  enterprise  represented  by  the  number  of  entre- 


124  Elements  of  Political  Economy 

preneurs  and  by  the  sum  total  of  their  capital,  which  to- 
gether constitute  demand.  Cobden  has  embodied  this 
law  in  the  picturesque  expression :  "When  two  employ- 
ers run  after  one  workman,  wages  rise;  when  two  work- 
men run  after  one  employer,  wages  fall."  If  we  suppose 
that  the  total  capital  available  and  the  number  of  entre- 
preneurs has  not  varied,  and  that  other  conditions  of  the 
market  have  not  changed,  an  increase  in  the  number  of 
laborers  who  offer  their  services  will  bring  about  a  fall 
in  wages,  whilst  a  decrease  of  their  number  will  cause 
wages  to  rise.  An  increase  or  decrease  of  capital  and  of 
entrepreneurs,  other  factors  being  constant,  will  produce 
the  opposite  result. 

4.  Cost  of  Living. — The  workman  must  live  on  his 
wages.  There  is  then  a  minimum  below  which  wages 
cannot  fall,  except  for  a  short  space  of  time,  without  caus- 
ing the  workman  to  emigrate  or  starve.  This  minimum 
is  not  determinate ;  it  varies  according  to  place  and  time. 
The  minimum  of  a  North  American  or  an  Englishman 
is  much  higher  than  the  minimum  of  a  Hindoo.  In 
France  the  workman  of  to-day  will  no  longer  content  him- 
self with  what  sufficed  for  him  in  the  eighteenth  century. 
Nevertheless  it  may  be  said  that,  being  given  the  minimum 
in  a  given  time  and  place,  the  wages  of  all  unskilled  work- 
men tend  to  approach  that  minimum  by  reason  of  compe- 
tition among  themselves.  On  the  other  hand  the  progress 
of  wealth  tends  to  raise  the  level  of  needs,  and,  conse- 
quently, to  raise  the  minimum,  and  the  progress  of  in- 
struction among  the  laboring  class,  and  the  use  of  machin- 
ery in  industries  tend  to  decrease  the  number  of  those  who 
are  subject  to  the  law  of  the  minimum.  The  maximum 
wages,  on  the  other  hand,  is  not  limited  in  any  way  by 
the  cost  of  living. 


Distribution  of  Wealth  125 

In  this  connection  it  is  important  to  distinguish  nomi- 
nal wages,  (i.  e.,  money  wages,)  from  real  wages,  which 
is  the  quantity  of  merchandise  money  wages  will  buy. 
Nominal  wages  may  rise  while  real  wages  are  stationary; 
this  is  what  happens  when  the  price  of  necessities  rise  in 
the  same  proportion  as  wages.  In  the  nineteenth  century 
both  kinds  of  wages  have  risen. 

5.  Personal  Qualities  of  the  Wage-Earner. — Skill, 
knowledge,  intelligence,  assiduity,  all  establish  a  consid- 
erable difference  between  wage-earners  as  regards  effi- 
ciency, and,  consequently,  as  regards  wages. 

In  an  industrial  enterprise  there  are  several  kinds  of 
wages : 

a.  The  wage,  or  salary,  of  the  manager,  as  in  a  stock 
company  formed  by  associated  capital.  Such  a  salary  is 
naturally  very  high  because  it  is  the  remuneration  for  the 
numerous,  diverse  and  rare  qualities  demanded  in  the  head 
of  an  establishment. 

b.  The  salary  of  clerks,  which  is  likewise  remunera- 
tion for  diverse  qualities,  intelligence  and  knowledge  of 
their  calling.  The  scale  extends  from  the  salary  of  the 
beginner  who  does  chores  to  that  of  the  cashier  of  a  large 
bank  who  must  be  liberally  paid  in  compensation  for  his 
probity  and  heavy  responsibilities. 

c.  Wages  proper,  or  the  wages  of  the  laborer,  in- 
cluding overseers. 

The  workmen  engaged  in  a  particular  industry,  even 
when  paid  by  the  day,  are  not  all  entitled  to  the  same 
wages.  It  is,  however,  not  uncommon  to-day  to  see  the 
workmen  in  the  same  trade  demanding  equal  wages,  and 
to  see  the  employers  apparently  conceding  the  point.  In 
this  case,  the  best  workmen  are  made  to  suffer  by  the  fact 
of   the  mass  of  mediocre  or   poor   workmen   imposing 


126  Elements  of  Political  Economy 

their  will  upon  all.  The  mediocre  and  poor  workmen 
are  jealous  of  the  superior  qualities  which  they  re- 
gard as  prejudicial  to  their  interests,  and  by  such  a  course 
they  likewise  secure  in  the  common  tariff  higher  wages 
than  they  are  really  worth  or  could  otherwise  obtain. 
Employers  likewise  suffer  by  this  system  because  it  dis- 
courages good  workmen  from  producing  as  much  as  they 
would  if  the  hope  of  adequate  remuneration  was  held  out 
to  them.  Equality  of  wages  is  nothing  other  than  the  level 
of  mediocrity  imposed  upon  labor  by  the  majority.  It  not 
only  impairs  the  energies  of  the  workmen,  but  cuts  away 
from  under  the  beginner  the  zeal  and  legitimate  ambition 
which  conduce  to  a  superior  knowledge  and  skill  in  his 
craft. 

6.     Political  Institutions  and  Customs. 

Some  of  the  causes  indicated  above  may  merge  in  each 
other,  as  for  example  personal  qualities  and  productivity, 
the  state  of  wealth  and  demand,  the  cost  of  living  and 
offer ;  nevertheless  it  is  well  to  enumerate  them  separately 
in  order  to  emphasize  them. 

In  a  certain  measure  their  action  is  counterbalanced; 
first,  by  political  institutions  which  may  falsify  the  natural 
play  of  economic  forces  by  curtailing  liberty,  or  by  special 
privileges  such  as  the  trade  guilds  formerly  enjoyed;  or 
again  by  limiting  the  hours  of  labor,  or  placing  obstacles 
to  emigration ;  second,  by  custom  which  maintains  wages 
in  a  certain  profession  or  locality  at  a  level  different  from 
that  which  obtains  in  the  same  profession  in  another  lo- 
cality. Sometimes,  as  for  example,  after  a  period  of  rising 
wages  followed  by  depression,  custom  may  constitute  a 
stubborn  obstacle  to  the  fall  of  wages. 

59.  Day  Labor,  Piece-work,  and  the  Hours  of  Labor. 
— The  principal  modes  of  hiring  labor  are  by  the  day  and 


Distribution  of  Wealth  127 

by  the  piece.  The  former  provides  for  a  fixed  sum  per 
hour  or  day,  this  sum  varying  according  to  place  and  pro- 
fession. The  second  provides  for  payment  by  the  piece 
for  the  work  accompHshed. 

Both  have  their  advantages.  For  work  which  haste 
might  mar,  such  as  art  work  in  metal,  or  for  work  in  which 
the  laborer  frequently  passes  from  one  operation  to  an- 
other, day  labor  is  desirable  and  even  necessary.  On  the 
other  hand,  for  work  which  is  always  the  same  and  which 
can  be  easily  reckoned,  piece-work  is  often  preferable.  In 
the  latter  the  workman  is  stimulated  by  personal  interest, 
produces  more,  and  is  surer  of  obtaining  remuneration  in 
proportion  to  his  work. 

Day  labor  and  even  piece-work  generally  call  for  a  de- 
terminate number  of  hours  of  labor  each  day.  In  many 
industries  the  hours  of  work  are  less  to-day  than  they  were 
50  years  ago.  The  diminution  of  the  hours  of  labor,  like 
the  rise  of  wages,  is  a  consequence  of  the  greater  produc- 
tivity of  labor, 

60.  Labor  Unions. — The  rate  of  wages  is  not  an  arbi- 
trary thing.  Labor  like  products  has  its  value.  We  have 
said  that  this  value  like  that  of  products  cannot  be  fixed 
except  by  a  free  discussion  between  him  who  offers  and 
him  who  demands  it,  unless  we  are  to  sufifer  constraint  and 
monopoly.  Nevertheless  the  absolute  freedom  of  contract 
on  both  sides  is  an  ideal  which  economic  facts  reproduce 
but  imperfectly  even  in  the  absence  of  legally  constituted 
monopolies. 

Employers  enjoy  two  advantages.  They  have  a  capital 
on  which  they  can  live  for  a  time  during  a  crisis ;  they  are 
relatively  less  numerous  because,  especially  in  this  day  of 
large  enterprises,  there  are  more  workmen  than  employers ; 
secondly,  whether  there  be  among  employers  a  direct  un- 


128  Elements  of  Political  Economy 

derstanding,  or  whether  there  be  simply  a  common  desire 
to  avoid  raising  wages,  their  action  on  the  price  of  labor 
comes  under  the  heading  of  cases  where  the  number  of 
buyers  is  limited  and  the  number  of  sellers  unlimited. 

Isolated,  the  workman  who  possesses  no  exceptional 
talents,  or  who  is  not  unique  in  his  trade,  has,  in  general, 
no  alternative  than  to  accept  the  market  rate  as  established 
by  usage.  He  can  enforce  his  demands  for  additional 
wages  only  in  certain  moments  when  labor  in  his  trade  is 
greatly  in  demand. 

On  the  other  hand,  when  united  and  cooperating  in  the 
demand  for  an  increase,  in  a  refusal  to  continue  work 
unless  the  increase  is  granted,  labor  has  at  command  a 
great  power  capable  of  counterbalancing  the  advantages 
of  the  employer. 

Both  in  France  and  in  England  the  Legislature  for  a 
long  time  feared  to  place  this  power  in  the  hands  of  the 
working  class.  In  France  it  was  by  the  law  of  1864  that 
labor  unions  ceased  to  be  illegal.  In  England  they  were 
legalized  in  1824.  The  right  to  form  Labor  Unions  is 
d,erived  logically  from  the  principle  of  freedom  of  contract, 
t.  e.,  from  the  liberty  to  offer  one's  work  at  such  and  such 
a  price,  to  work  or  not  to  work,  to  confer  with  a  comrade 
in  mutual  interest,  to  quit  work  and  to  resume  it  only  on 
certain  conditions.  Thus  practiced,  Unionism  is  but  a 
phase  of  individual  liberty.  In  certain  cases  it  may  help, 
and  it  has  helped,  more  than  once,  to  raise  wages. 

But  Unionism  means  war,  and  civil  war  at  that.  When 
united  labor  lays  down  its  conditions,  and  failing  to  have 
them  accepted,  persists  in  its  demands,  its  weapon  is  the 
strike,  which  is  the  simultaneous  abandonment  of  work. 
Now  when  workshops  are  deserted  the  world  grows 
poorer.    The  workman  consumes  his  savings  and  goes  into 


Distribution  of  Wealth  129 

debt;  the  entrepreneur  finds  his  activity  paralyzed.  Capi- 
tal stagnates  and  dwindles  away,  and  material  suffers  de- 
terioration. Impoverishment  of  labor  and  industry ;  these 
are  the  immediate  consequences  of  strikes. 

Again,  when  war  is  once  on,  passion  often  takes  the 
place  of  reason,  men  are  blinded  to  their  own  true  interests 
and  lose  respect  for  the  rights  of  others.  Workmen  are 
more  exposed  than  employers  to  faults  of  this  kind.  They 
deliberate,  but  if  some  among  them  are  not  disposed  to  fol- 
low the  majority  in  the  project  of  declaring  war,  that 
majority  tries  to  impose  its  decision  upon  them  by  intimi- 
dation. 

Moreover,  when  politics  enter  into  the  question,  social 
order  is  exposed  to  danger  particularly  where  the  working 
population  is  numerous;  the  strike  then  becomes  a  public 
menace. 

To  subject  the  liberty  of  some  to  the  will  of  others,  and 
to  violate  the  rights  of  property  is  to  misconceive  the  prin- 
ciple of  Unionism  which  is  based  upon  individual  liberty. 
In  the  face  of  a  public  peril  the  government  has  a  right  to 
take  repressive  measures  in  order  to  guard  the  safety  of 
the  state  which  is  more  vital  to  individual  liberty  than  the 
right  of  Unionism. 

Unionism  is  then  a  right,  but  like  the  right  of  the  na- 
tion to  resort  to  war,  it  must  be  used  only  in  the  last  ex- 
tremity, after  all  methods  of  conciliation  in  the  interest  of 
both  parties  have  been  exhausted. 

61.  Profit  Sharing. — Profit  Sharing  is  a  free  con- 
tract between  the  employer  and  the  wage-earner  by  which 
the  latter  in  addition  to  his  ordinary  salary  receives  a  part 
of  the  profits  of  the  enterprise;  he  does  not  share  in  the 
losses.    It  rests  upon  a  double  principle ;  namely,  that  per- 

9 


130  Elements  of  Political  Economy 

sonal  interest  is  the  best  stimulus  to  human  activity,  and 
to  each  according  to  his  works. 

A  fixed  percentage  of  the  profits  is  allotted  to  the 
workman  and  is  generally  distributed  as  a  dividend  after 
the  inventory  is  taken.  The  share  of  each  workman  is  pro- 
portional to  the  profits  realized,  and  there  is  no  share  when 
there  is  no  profit.  The  participants  then  know  that  if  they 
are  industrious,  if  they  economize  their  time,  if  they  are 
careful  of  the  raw  material  and  tools,  if  the  customers  are 
satisfied,  and  orders  flow  in,  the  profit  which  will  result 
from  good  management  will  be  partly  theirs.  It  is  to 
their  personal  interest  to  do  conscientious  work  and  watch 
each  other.  This  method  is,  of  course,  efficacious  only 
when  the  share  in  the  profits  is  sufficiently  large  to  really 
awaken  personal  interest. 

Profit  sharing  is  not  an  association.  The  employer 
generally  remains  the  master  of  the  enterprise.  Ordinarily 
he  does  not  even  include  all  the  employees  in  the  plan,  and 
himself  fixes  certain  conditions,  such  as  preliminary 
period  of  service  and  average  wage.  Nevertheless  it  is  a 
contract,  and  the  promised  share  in  the  profits  is  an  obli- 
gation. It  differs  essentially  from  the  bonus  which  certain 
employers  give  to  their  employees  at  the  end  of  the  year. 

Large  commercial  houses  and  great  factories  have  long 
practiced  it  in  the  case  of  the  higher  employees.  Many  of 
the  great  shops  give  to  their  employees  a  certain  percentage 
on  their  sales,  and  to  the  foremen  an  interest  in  the  total 
business  of  their  departments.  The  application  of  this 
system  to  the  mass  of  workmen  or  employees  of  an  estab- 
lishment is  more  recent;  it  hardly  goes  back  further  than 
the  second  half  of  the  nineteenth  century. 

Undoubtedly  this  plan  is  not  adapted  to  all  enterprises, 
and  where  so  adapted  cannot  always  be  applied  under  the 


Distribution  of  Wealth  131 

same  rules.  It  is  nevertheless  an  important  economic  in- 
stitution ;  althoug-h  little  practiced  as  yet,  it  is  one  of  the 
best  means  of  interesting  the  wage-earner  in  the  success  of 
the  enterprise.  Properly  applied,  it  is  profitable  to  both 
parties ;  first,  to  the  wage-earner,  who  finds  in  it  an  addi- 
tion to  his  income,  and  a  motive  for  long  service  in  the 
same  establishment,  and  who  by  means  of  it  conceives  a 
more  correct  idea  of  profits  in  general ;  next,  to  the  em- 
ployer who  is  not  performing  an  act  of  charity  but  of  in- 
telligent administration  and  who  finds  in  it  ample  compen- 
sation for  the  apparent  pecuniary  sacrifice  he  makes. 

62.  Cooperative  Societies. — Profit  sharing  may  ame- 
liorate the  condition  of  the  wage-earner.  Cooperative  so- 
cieties aim  higher ;  they  seek  to  emancipate  the  workman 
and  make  him  an  entrepreneur.  The  first  cooperative  so- 
cieties in  France  were  founded  in  1830.  They  did  not  find 
favor,  however,  until  after  the  success  of  the  Rochdale 
Association  in  England,  and  that  of  the  Schultze-Delitsch 
which  spread  the  idea  of  cooperation  in  Germany. 

At  bottom  a  cooperative  society  is  nothing  but  an  as- 
sociation of  owners  of  capital  and  of  laborers.  In  prin- 
ciple it  appears  to  introduce  nothing  new  in  the  organiza- 
tion of  labor,  but  in  reality  it  produces  effects  quite  differ- 
ent from  the  ordinary  associations  of  capitalists  and  entre- 
preneurs. 

Associations  of  Consumers  or  Cooperative  Distribu- 
tion.— This  takes  the  form  of  the  cooperative  store  whicn 
offers  to  its  members,  through  the  joint  purchase  of  sup- 
plies, the  benefit  resulting  from  wholesale  operations  and 
the  guarantee  of  good  quality.  Members  receive  a  cer- 
tificate for  each  purchase  at  the  store  and  at  the  end  of 
the  year  the  profits  of  the  store  are  divided  back  amongst 
the  members  according  to  these  records  of  their  purchases. 


132  Elements  of  Political  Economy 

Cooperative  Production. — This  latter  associates  its 
members  for  the  purpose  of  carrying  on  an  industry  by 
their  common  labor.  A  social  capital  is  formed  from  their 
savings  or  borrowed  money.  If  the  capital  is  insufficient 
at  the  start  this  fact  incites  them  to  increase  it  little  by 
little  by  extra  effort  and  privation. 

Of  these  two  forms  the  first,  cooperative  distribution, 
has  in  many  places  met  with  marked  success;  less  in 
France  than  in  England.  In  great  cities  it  has  to  contend 
with  the  fact  that  its  members  are  greatly  scattered  and 
may  find  the  cooperative  store  too  distant. 

The  second  form  is  the  supreme  aim  of  the  advocates 
of  cooperation  who  seek  to  free  the  workmen  from  the  em- 
ployer and  to  suppress  the  wage  system.  The  wage  system 
cannot  be  suppressed  because  there  will  always  be  many 
industries  whose  exploitation  by  associated  labor  will  be 
impossible  or  disastrous,  and  for  many  laborers,  on  ac- 
count of  their  tastes  or  aptitude,  the  wage  system  will  re- 
main the  most  convenient  form  of  remuneration.  We  may 
even  add  that  cooperative  production,  the  practice  of  which 
has  hitherto  been  quite  limited,  does  not  appear  destined 
to  replace  the  wage  system  in  a  single  industry,  and  that 
recent  experience  points  rather  to  the  concentration  of  a 
great  number  of  workmen  under  the  authority  of  a  single 
employer  or  company  than  to  the  multiplication  and  suc- 
cess of  cooperative  societies. 

The  cooperative  idea  then  is  not  likely  to  transform  the 
economic  world.  If,  however,  it  succeeds,  it  will  in  certain 
respects  assume  a  useful  place  among  the  different  modes 
of  organization  to  which  freedom  of  contract  gives  rise. 
The  following  are  some  of  its  advantages:  First,  men 
work  so  much  harder  and  so  much  better  when  they  are 
stimulated  by  personal  interest  and  by  the  sense  of  re- 


Distribution  of  Wealth  133 

sponsibility,  which  conditions  exist  to  a  much  greater  de- 
gree in  cooperation  than  in  the  wage  system. 

Second,  a  member  of  a  cooperative  society  soon  per- 
ceives that  in  order  to  pursue  his  labor  neither  his  hands 
nor  his  intelHgence  alone  suffice;  he  needs  capital,  often 
much  capital.  If  he  has  a  firm  determination  to  succeed 
he  will  redouble  his  efforts  and  privations  in  order  to  create 
and  enjoy  this  fertile  thing,  capital ;  and  what  this  experi- 
ence will  teach  him  better  than  any  economic  reasoning  is 
that  capital  is  entitled  to  remuneration  and  to  its  share  in 
the  product.  The  increase  of  wealth  and  well  being  which 
flows  from  greater  activity  and  saving  on  the  part  of  the 
ordinary  producer  may  then  be  realized  by  the  members  of 
the  cooperative  society. 

How  about  the  workmen  who  remain  wage-earners? 
If  the  wage-earners  see  that  more  is  made  by  cooperation 
they  will  have  an  excellent  argument  in  demanding  higher 
wages  from  their  employers  with  the  alternative  of  them- 
selves entering  such  an  association  in  case  the  employers 
refuse.  If,  on  the  other  hand,  they  see  that  with  the  great- 
est care  these  associates  do  not  realize  much  more  from 
their  day's  labor  than  they  themselves  do,  it  will  be  with 
bad  grace  that  they  complain  of  their  condition  and  accuse 
their  employers.  A  cooperative  society  may  in  certain 
cases  serve  as  a  thermometer  of  wages,  and  perhaps  pre- 
vent some  of  the  internal  wars  we  call  strikes.  But  certain 
difficulties  present  themselves  in  cooperative  production. 
In  a  small  enterprise  of  two  or  three  individuals  the  as- 
sociates can  easily  reach  an  understanding  in  allotting  the 
work;  but  15  or  20  working  together  experience  more 
difficulty;  there  are  15  or  20  separate  wills  which  must 
agree  upon  a  common  course  and  15  or  20  units  of  energy 
which  must  always  be  equal. 


134  Elements  of  Political  Economy 

A  cooperative  society  like  every  other  enterprise  needs 
to  be  directed.  Whilst  maintaining  equality,  it  is  corre- 
spondingly important  to  respect  the  authority  of  the  man- 
ager, a  thing  which  appears  difficult  for  certain  natures. 

There  are  in  industry  certain  disappointments  which 
must  be  heroically  endured  even  when  one  is  innocent  of 
the  evil  which  has  befallen,  and  certain  crises  which  must 
be  bridged  by  privation.  All  natures  are  not  tempered  in 
a  fashion  to  stand  the  test. 

As  a  cooperative  society  generally  commences  with  a 
small  capital  it  is  condemned  to  at  first  experience  many 
difficulties ;  it  must  labor  and  wait. 

This  lack  of  initial  capital  seems  thus  far  to  have  pre- 
vented cooperation  from  supplanting  other  forms  of  asso- 
ciation in  the  great  modern  industries.  Moreover,  the  su- 
perior intelligence  and  knowledge  necessary  to  the  safe 
conduct  of  certain  enterprises  present  a  no  less  insurmount- 
able obstacle  to  cooperation. 

Accordingly,  cooperation,  particularly  productive  co- 
operation, encounters  serious  difficulties  both  of  an  eco- 
nomic and  moral  character  which  necessarily  limit  its 
extent  and  importance. 

Cooperative  production  and  cooperative  distribution 
will  probably  not  supplant  the  wage  system  and  the  shop- 
keeper ;  but  such  as  succeed  in  surmounting  inherent  diffi- 
culties will  prove  useful  both  to  the  workingman  and  the 
consumer. 

63.  Criticism  of  the  Wage  System. — The  wage  sys- 
tem has  been  bitterly  criticised  as  an  iniquitous  exploita- 
tion of  labor  on  the  part  of  capital.  In  reality  it  is  but  an 
association  of  labor  and  capital.  Without  labor  capital 
can  accomplish  nothing;  without  capital  labor  is  power- 


Distribution  of  Wealth  135 

less,  and  labor  is  the  more  productive  and  remunerative 
according  as  capital  is  more  abundant.    (See  par.  25). 

The  wage  system  is  neither  exploitation  nor  slavery 
but  free  contract.  Man  exploits  matter,  and  as  individual 
liberty  has  been  secured  from  time  to  time  in  various  coun- 
tries by  the  abolition  of  slavery,  men  have  had  no  other 
slaves  than  the  forces  of  nature  appropriated  by  their  in- 
dustry. They  live  with  others  who  are  their  equals  and 
with  them  go  into  the  market  where  the  contracting  parties 
each  defend  their  own  interests.  The  workman  can  no 
more  say  that  he  is  exploited  by  the  employer  than  the  em- 
ployer can  say  this  of  his  banker,  the  retail  merchant  of 
the  wholesale  merchant,  or  the  consumer  of  the  trades- 
man. 

No  doubt  the  capitalist  often  finds  himself  in  a  position 
of  advantage  in  a  dispute  with  his  workmen  over  wages. 
This  advantage  is  natural,  since  capital  is  a  power  capable 
of  increasing  the  productive  force  and  revenue  of  the  in- 
dividual; it  is  the  result  of  a  virtue,  saving.  By  an  in- 
crease of  well-being  it  justly  recompenses  him  who  has 
made  the  saving  or  those  for  whose  benefit  it  has  been 
made.  The  wage-earner  by  saving  may  often  himself  be- 
come a  capitalist. 

Frequently  he  does.  A  great  number  of  employees, 
foremen  and  domestics  have  savings  which  are  invested  in 
interest-bearing  securities  and  though  remaining  wage- 
earners,  are  in  a  position  to  understand  that  they  are 
neither  exploiters  nor  exploited. 

Nevertheless,  like  all  modes  of  human  activity,  the 
wage  system  has  its  inconveniences.  One  of  the  gravest 
of  these  is  the  feeble  extent  to  which  it  stimulates  senti- 
ments of  responsibility  and  self-interest.  One  workman 
performs  his  task  slowly,  and  handles  badly  the  material 


136  Elements  of  Political  Economy 

confided  to  him;  another  beheves  he  has  performed  his 
duty  if  he  spends  the  necessary  number  of  hours  at  the 
shop.  Each  thinks  that  his  neghgence  will  not  prevent  his 
receiving  the  daily  or  monthly  pay. 

Piece-work,  which  rewards  the  laborer  in  proportion 
to  the  task  performed,  partly  remedies  this  defect.  But  not 
all  kinds  of  work  can  be  exactly  measured.  Moreover,  in 
making  use  of  this  kind  of  remuneration  which  is  ordi- 
narily preferable,  another  danger  must  be  guarded  against, 
that  of  haste  and  resultant  bad  workmanship. 

Despite  the  criticisms  upon  it  and  despite  its  incon- 
veniences, the  wage  system  remains  a  legitimate  form  of 
industrial  organization  and  an  equitable  mode  of  distribu- 
tion. 

64.  Socialism  and  Its  Doctrines  Relative  to  the  Dis- 
tribution of  Wealth. — The  problems  which  the  distribu- 
tion of  wealth  raises  have  led  to  criticism  not  only  of  the 
wage  system  but  of  the  entire  present  organization  of  so- 
ciety. They  have  inspired  certain  theorists  with  the 
thought  of  reconstructing  society  on  a  plan  which  would 
banish  misery  and  solve  all  economic  difficulties.  In  order 
to  attain  this  end  they  propose  to  substitute  for  natural 
distribution  under  a  system  of  freedom  of  contract,  ar- 
tificial distribution,  by  authority,  of  either  the  whole  or 
a  part  of  wealth.  Most  of  them  confide  this  distribu- 
tion to  the  state,  investing  it  with  the  right  to  intervene, 
in  a  more  or  less  absolute  manner,  in  the  production,  in  the 
exchange,  and  even  in  the  consumption  of  wealth.  These 
doctrines,  quite  diverse  and  even  contradictory,  constitute 
what  we  call  Socialism.  In  its  etymology,  the  word  social- 
ism indicates  simply  the  existence  of  a  social  state,  but  it 
has  acquired  a  particular  meaning  which  we  shall  endeavor 
to  define.    Like  political  economy,  socialism  treats  of  the 


Distribution  of  Wealth  137 

science  of  economics.  But  by  an  imperfect  examination 
of  the  data  of  the  problem,  it  generally  arrives  at  conclu- 
sions hostile  to  liberty,  and  if  it  were  practiced  would  pre- 
vent progress  and  the  growth  of  wealth.  Two  famous 
schools  of  socialism  were  founded  in  France  by  Saint 
Simon  and  Fourier,  whose  principal  writings  date  from  a 
period  when  the  development  of  industry  was  commencing 
to  fix  attention  on  the  problems  relating  to  wealth. 

Saint-Simonism  demanded  that  all  capital,  circulating 
and  fixed,  should  cease  to  be  the  property  of  individuals, 
and  should  be  placed  in  the  hands  of  a  head  of  the  state 
called  "The  Social  Priest."  The  priest  either  himself  or 
through  his  agents  distributed  this  capital  to  those  whom 
he  thought  most  capable  of  using  it  profitably.  Rank  and 
function  in  society  were  fixed  by  his  authority.  Finally, 
as  products  were  created  and  sent  to  him,  he  would  dis- 
tribute them  to  consumers  whom  he  judged  most  worthy 
to  receive  them.  In  this  way  Saint-Simonism  hoped  to 
draw  from  existing  capital  much  greater  revenue  and  to 
destroy  the  inequality  due  to  birth. 

He  failed  to  perceive  that  his  system  would  substitute 
the  odious  inequalities  of  favoritism ;  that  it  would  weaken 
the  personal  incentive  which  under  a  regime  of  liberty, 
each  individual  has  to  accumulate,  preserve  and  increase 
his  own  capital,  and  would  soon  effect  an  annihilation  of 
capital,  which  no  individual  would  any  longer  be  interested 
in  husbanding,  but  which,  on  the  contrary,  each  would  be 
disposed  to  squander  or  consume  unprofitably;  that  there 
would,  furthermore,  be  fraud  with  respect  to  the  product, 
part  of  which  some  would  seek  to  hide  in  order  not  to  be 
compelled  to  surrender  it  to  the  social  priest,  and  that 
finally  Saint-Simonism,  suppressing  freedom  of  contract, 
would  have  created  a  society  composed  entirely  of  wage- 


138  Elements  of  Political  Economy 

earners,  but  of  wage-earners  remunerated  arbitrarily  at 
the  mercy  of  the  despot  and  his  agents. 

Saint-Simonism,  with  all  its  errors,  had  the  merit  of 
placing  in  bold  relief  the  influence  of  science  in  industry, 
and  more  particularly  the  power  of  association  at  an  epoch 
when  that  influence  and  that  power  were  only  beginning. 

Fourierism  proposed  to  banish  all  moral  obligations, 
even  that  of  working  for  a  livelihood,  and  to  associate  all 
men  into  groups  called  Phalanxes,  giving  free  play  to  all 
the  human  passions,  and  trusting  to  the  natural  play  of 
these  passions  for  the  protection  of  wealth  and  the  accom- 
plishment of  all  social  functions.  Each  Phalanstere,  where 
a  phalanx  of  1,800  persons  was  to  be  installed,  was  to  be 
composed  of  symmetrical  buildings,  palaces  in  point  of  ele- 
gance, and  to  have  around  it  vast  fields  of  cultivated  land. 
Everyone  would  be  entitled  to  a  minimum  of  subsistence ; 
but  in  an  annual  distribution  of  products,  agricultural  and 
industrial,  that  minimum  would  be  added  to,  according  to 
the  labor,  talent  and  capital  of  each  individual.  Under  the 
pretext  of  not  curtailing  liberty,  the  author  of  this  system 
rejected  all  ideas  of  duty  and  constraint.  He  did  not  even 
wish  to  impose  on  children  the  necessity  of  instruction. 
By  the  sole  attraction  of  voluntary  labor  continually 
varied,  he  hoped  to  render  men  much  more  laborious  than 
they  are  in  actual  society. 

In  reality,  Fourierism  only  organized  license,  and  au- 
thorized laziness,  two  vices  which  are  fatal  to  wealth,  and 
the  first  of  which  is  destructive  of  society  itself. 

Saint-Simonism  conceived  a  theocratic  despotism; 
Fourierism,  complete  anarchy. 

Louis  Blanc  and  other  theorists,  after  the  revolution  of 
1848,  proclaimed  the  right  to  labor,  i.  e.,  the  right  of  each 
man  to  an  opportunity    to  earn  a  livelihood.     This  right 


Distribution  of  Wealth  139 

has  as  a  corollary  the  duty  of  the  state  "to  furnish  work  to 
worthy  men  who  could  not  procure  it  otherwise."  They 
thus  thought  to  suppress  the  misery  arising  from  enforced 
idleness. 

How  could  the  state  as  sole  entrepreneur  ascertain  and 
satisfy  the  infinitely  varied  needs  of  consumers  any  better 
than  individual  entrepreneurs  under  the  present  regime  of 
competition?  If  the  state  did  not  succeed  so  well  in  ac- 
complishing this,  the  system  would  be  condemned  by  that 
fact  alone.  Supposing  that  it  did  succeed  as  well  in  ascer- 
taining the  needs  of  the  community,  it  would  then  make 
exactly  the  same  things  as  now,  and  how  could  it  insure 
to  the  laborer  more  work?  If  it  attempted  to  produce 
more  in  certain  industries  which  it  exploited,  it  would  be 
compelled,  in  order  to  find  a  market  for  its  products,  to 
force  the  consumer  to  buy  more  than  he  wanted ;  how 
could  he  pay  for  it  ?  If  the  state  undertook  to  provide  work 
for  all  who  could  not  find  it  elsewhere,  it  would  soon  wit- 
ness flowing  to  its  shops  the  mass  of  incapable  and  lazy.^ 

^  It  is  only  the  stern  necessity  of  earning  a  livelihood  that  keeps 
most  men  going.  If  the  doors  of  state  employment  were  always 
open,  the  workman  in  private  industry  would  be  more  careless  of  his 
place,  less  industrious  and  conscientious,  and  more  ready  to  find 
fault  and  leave  his  employer;  the  result  would  soon  be  the  absorption 
of  all  labor  by  the  state.  When  this  had  occurred,  the  only  way  the 
man  who  refused  to  work  could  be  made  to  work  would  be  by  im- 
prisonment and  compulsion,  involving  a  virtual  return  to  slavery. 
Private  property,  and  private  enterprise,  a  necessary  corollary,  are 
the  institutions  which  save  society  from  the  slave  system. 

The  existence  of  a  body  of  unemployed  is  a  sad  feature  of  society. 
It  is  an  evil  which  can  be  reduced  by  intelligent  handling,  but  which 
we  can  never  hope  to  remove  entirely.  It  is  to  the  inequalities  of 
men  that  it  is  due.  No  matter  how  high  a  stage  of  civilization  we 
may  reach,  these  inequalities  remain.  The  man  whose  incapacity, 
either  moral  or  intellectual,  has  left  him  behind  in  the  race,  is  still  a 
much  superior  being  to  the  average  individual  in  the  lower  stages  of 


I40  Elements  of  Political  Economy 

The  doctrine  of  the  right  to  employment  is  unreal- 
izable, Utopian  and  dangerous.  Another  conception  no 
less  unrealizable  in  its  entirety,  although  partially  applied 
in  certain  trades,  is  the  equality  of  wages. 

Proudhon  toward  the  same  epoch,  reflecting  upon  the 
mutuality  of  services  and  the  gratuitous  nature  of  credit, 
thought  to  better  the  lot  of  the  worker  by  taking  away 
from  capital  and  the  entrepreneur  their  share  in  the  dis- 
tribution. We  know  what  to  think  of  the  gratuitous 
nature  of  credit.  (See  par.  52) .  It  is  easy  to  say  that  capi- 
tal has  no  right  to  a  share  in  the  production,  but  it  is  im- 
possible to  secure  its  cooperation  without  offering  it  some- 
thing. 

In  Germany,  Karl  Marx  contended  for  a  similar  theory 
in  demanding  that  the  instruments  of  labor  should  be 
placed  freely  at  the  disposition  of  the  laborer,  and  claim- 
ing for  the  laborer  the  right  to  the  whole  of  the  product 
he  had  fashioned.  He  thought  that  the  portion  appropri- 
ated under  the  terms  rent,  interest  and  profit,  operated  to 
the  injury  of  labor.  To  pretend  as  he  did  that  capital  is 
helpless  or  that  it  has  only  social  value  and  has  no  value 
as  private  property,  that  labor  is  the  sole  creator  of  the 
whole  value  of  the  product,  is  to  entirely  ignore  the  nature 
of  the  phenomenon  of  production  and  the  role  the  different 
elements  play  in  it.  That  doctrine, — which  by  the  way 
Marx  himself  finally  refuted — is  the  one  most  generally 
adopted  by  the  Socialists  to-day. 

All  these  doctrines  are  not  communistic,  properly  so 

social  development ;  infinitely  superior,  for  example,  to  the  American 
Indian,  or  to  the  savage  in  the  interior  of  Africa.  The  important 
thing  is  his  relative  inferiority  to  those  about  him.  If  the  state  were 
to  care  for  him  it  would  mean  that  the  penalties  of  inferiority  would 
in  a  measure  be  removed  and  the  number  of  the  inferior  would  in 
consequence  be  multiplied. — Translator. 


Distribution  of  Wealth  141 

called,  but  they  tend  in  that  direction.  Communism  de- 
nounces outright  all  individual  property  and  appropria- 
tion, and  recognizes  only  in  the  community,  (2.  e.j  in  the 
state)  the  right  to  possess  and  to  distribute  the  wealth  pro- 
duced by  all.  One  of  the  favorite  maxims  of  communism, 
which  is  itself  divided  into  several  sects,  is  "to  each  ac- 
cording to  his  needs."  We  have  indicated  to  what  the 
practice  of  that  maxim  would  lead. 

These  doctrines  are  the  more  erroneous  according  as 
they  violate  the  more  markedly  the  right  to  liberty,  and 
reject  its  results,  namely : — individual  property,  competi- 
tion, and  the  remuneration  of  each  according  to  his  works 
and  by  his  works.  All  systems  other  than  that  of  indi- 
vidual liberty,  protected  in  its  diverse  manifestations  by 
the  power  of  the  state,  impair  the  productive  forces  of  so- 
ciety. 

The  Socialist  doctrines  which  have  appeared  in  our 
time  with  the  development  of  wealth  have  had  this  merit, 
that  they  have  caused  political  economy  to  search  more 
profoundly  than  it  had  hitherto  done  the  abysses  of  misery 
in  the  lower  ranks  of  society,  and  that  they  have  drawn  at- 
tention to  grave  problems  calling  for  solution. 

On  the  other  hand,  they  have  exaggerated  the  extent 
of  this  wretchedness,  ignored  the  true  harmony  of  social 
progress,  and  planted  in  many  minds  the  seed  of  unrest, 
leading  them  to  condemn  the  present  and  dream  of  a  pei- 
fect  social  condition  of  the  future. 

Now  man,  who  is  born  into  the  world  to  suffer  (and 
who  is  it  that  is  without  care?)  likes  to  believe  that  the 
fault  is  in  a  defective  organization  of  society,  or  in  fate, 
rather  than  in  himself,  and  eagerly  resorts  to  the  contem- 
plation of  a  happier  ideal.  This  ideal,  which  religion 
places  on  high,  the  socialist  doctrines  locate  here. 


142  Elements  of  Political  Economy 

Resume 

The  wage  is  a  system  of  free  contract  for  the  hire  of 
labor. 

The  laborer  is  a  worker  who  receives  out  of  another's 
capital  a  remuneration  for  executing  a  certain  task  with 
the  aid  of  that  other's  capital ;  this  remuneration,  which  is 
fixed  in  advance,  is  called  wages. 

Like  everything  that  has  value,  wages  are  subject  to 
the  law  of  offer  and  demand.  The  principal  elements  in 
fixing  the  rate  of  wages  are:  Productivity  of  labor,  the 
general  state  of  wealth  in  the  country,  offer  and  demand 
of  labor,  cost  of  living,  personal  qualities  of  the  wage- 
earner,  the  political  institutions,  and  custom. 

The  right  to  form  Labor  Unions  is  logically  derived 
from  the  principles  of  individual  liberty ;  but  like  the  right 
to  resort  to  war,  it  must  be  used  only  in  the  last  extremity. 

Profit  sharing,  which  consists  in  dividing  a  fixed  por- 
tion of  profit  amongst  the  laborers,  constitutes  one  of  the 
best  modes  of  interesting  the  wage-earner  in  the  success 
of  the  enterprise. 

Cooperative  distribution  and  cooperative  production 
can  never  supplant  the  wage  system,  but  in  cases  where 
they  succeed  in  surmounting  the  difficulties  inherent  in 
the  system,  they  may  be  most  useful. 

It  is  false  to  say  that  the  wage  system  is  an  exploita- 
tion of  labor  on  the  part  of  capital.  The  wage  system  is 
really  an  association  of  labor  and  capital.  Although  it  is 
open  to  the  reproach  of  stimulating  too  feebly  the  senti- 
ments of  responsibility  and  personal  interest,  it  is  never- 
theless a  legitimate  form  of  industrial  organization  and 
an  equitable  mode  of  distribution. 

Socialist  doctrines  substitute  for  natural  distribution 


Distribution  of  Wealth  143 

under  a  regime  of  lil^erty  an  artificial  distribution  by  au- 
thority, which,  Hke  all  systems  inconsistent  with  freedom 
of  contract,  would  result  in  impairing  the  productive 
forces  of  society. 


POPULATION  AND  PAUPERISM 

65.  Population,  Production  and  Consumption.  66.  The  Causes  of 
Density  of  Population.  67.  Malthus  and  the  Equilibrium  of  Popula- 
tion and  Wealth.  68.  Emigration  and  Colonization.  69.  Poverty 
and  Pauperism.     70.  Assistance. 

65.  Population,  Production  and  Consumption. — The 
question  of  population  interests  all  students  of  political 
economy  because  man  is  really  the  sole  agent  in  every 
economic  movement.  It  is  he  who  produces  and  consumes. 
Where  there  are  many  active  men  supplying  labor,  much 
wealth  is  created.  On  the  other  hand,  the  presence  of  a 
large  population  means  that  much  is  consumed.  Between 
these  three  terms,  population,  production  and  consump- 
tion, there  exists  an  intimate  relation. 

If  this  relation  were  constant,  and  if  the  distribution  of 
wealth  remained  the  same,  i.  e.,  if  each  man  always  pro- 
duced, received  and  consumed  in  the  same  space  of  time 
a  like  quantity  of  goods,  there  would  be  no  population 
question.  The  equilibrium  would  remain  the  same,  and 
the  condition  of  humanity  would  be  uniform  and  un- 
changed. 

But  we  know  that  these  factors  are  not  constant,  that 
men  in  each  social  group  produce  more  or  less  according 
to  their  personal  qualities,  according  to  the  capital  avail- 
able, and  according  to  the  state  of  knowledge. 

Foremost  among  the  products  necessary  to  sustain  life 
are  the  foodstuffs.     They  are  produced  from  land,  which 


144  Elements  of  Political  Economy 

exists  in  limited  quantity.  Land  is  then  the  fourth  term 
which  we  must  take  into  account  in  considering  the  prob- 
lem of  population. 

The  population  question  is  a  complex  question  and  one 
of  the  gravest  with  which  political  economy  has  to  deal, 
for  the  reason  that  wealth,  being  created  in  order  to  sus- 
tain life,  and  to  procure  human  well-being,  the  condition 
of  the  population  may  be  considered  as  the  criterion  of 
the  economic  organization  of  a  given  society.  It  is  like- 
wise one  of  the  most  difficult  of  questions  and  has  become 
the  subject  of  a  special  science  called  "Demography," 
which  borrows  almost  all  its  data  from  statistics. 

Before  proceeding  to  point  out  some  of  the  conclusions 
of  this  science,  we  may  lay  down  the  general  conditions 
of  equilibrium  between  population  and  wealth. 

When  the  production  of  wealth  and  the  accumulated 
capital  in  a  given  society  increase,  the  population  has  a 
tendency  to  increase.  When  the  average  of  individual  con- 
sumption increases,  the  population,  despite  an  increase  of 
wealth,  has  a  tendency  to  remain  stationary. 

These  laws,  like  all  economic  laws,  have  their  excep- 
tions. Secondary  causes  often  modify  their  effect  and 
moral  conditions  produce  great  differences  between 
nations  in  the  matter  of  increase  and  density  of  popula- 
tion. 

66.  Causes  of  Density  of  Population. — Populations 
are  grouped  in  different  regions  of  the  globe,  proportion- 
ally to  the  means  of  subsistence  they  find  there. 

This  is  a  general  truth  but  there  are  several  reasons 
why  we  must  not  regard  it  as  an  absolute  rule.  The  prin- 
cipal of  these  is  that  the  expression,  "Means  of  Subsist- 
ence," is  a  vague  term  which  differs  in  different  countries 
and  times.     For  example,  the  Hindoos  live  256  to  the 


Distribution  of  Wealth  145 

square  mile,  producing  and  consuming  less  than  the 
French  who  live  only  184  to  the  square  mile. 

Nevertheless,  it  must  be  observed  in  conformance  with 
the  rule  that  the  glacial  zone  has  almost  no  inhabitants  be- 
cause it  offers  little  means  of  subsistence  and  well-being. 
The  same  is  true  of  deserts  and  mountains  little  adapted 
to  agriculture,  and  the  steppes,  which  are  likewise  ill 
adapted  to  cultivation,  have,  with  certain  exceptions,  a 
sparse  population.  On  the  other  hand,  population  is  gen- 
erally dense  in  arable  plains,  and  especially  in  the  valleys 
where  the  soil  is  as  a  rule  fertile,  and  through  which  pass 
the  navigable  rivers,  on  the  coast  where  fisheries  supply 
food,  and  where  commerce  erects  ports,  along  the  high- 
ways of  commerce,  natural  or  artificial,  near  mines,  and 
in  the  vicinity  of  water-power  which  attracts  factories  and 
in  great  cities  where  capital  is  abundant  and  where  there 
is  a  great  demand  for  labor. 

There  is  a  considerable  difference  in  the  number  of  in- 
habitants which  a  like  extent  of  territory  supports.  Thus, 
whilst  the  province  of  Archangel,  a  frigid  region,  has  a 
density  of  i  inhabitant,  and  the  province  of  Astrachan.  a 
region  of  steppes,  a  density  of  7.4,  Lancashire,  a  manu- 
facturing region  of  England,  has  1,800  inhabitants  to  the 
square  mile. 

Man  is  attracted  to  regions  where  natural  wealth,  ad- 
vantageous conditions  of  soil,  and  the  resources  of  civiliza- 
tion lead  him  to  believe  that  his  labor  will  be  remuner- 
ative. He  locates  there  and  multiplies.  In  general  these 
regions  are  not  only  the  most  densely  populated  but  they 
are  the  regions  where  the  density  of  population  increases 
most  rapidly.  It  would  seem  that  in  the  same  country  a 
region  which  had  50  inhabitants  to  the  square  mile  would 
be  more  capable  of  receiving  recruits  than  a  region  which 

10 


146  Elements  of  Political  Economy 

had  150.  What  happens  is  often  quite  the  opposite  and 
for  the  very  reason  that  the  density  already  existing  in 
the  latter  region  was  due  to  the  superior  opportunities  it 
offered  and  still  offers  for  the  creation  of  wealth. 

The  attraction  of  population  in  the  direction  of  wealth 
may  be  so  pronounced  that  in  a  country  whose  total  popu- 
lation increases  but  little,  the  concentration  in  great  cen- 
ters of  industry  and  commerce  results  in  a  falling  off  of 
the  number  of  inhabitants  in  less  favored  sections  of  the 
country.  This  has  been  the  case  in  France  during  the 
last  half  of  the  nineteenth  century,  and  in  America  is  ob- 
servable in  New  England. 

When  a  region  newly  acquires  some  one  of  the  quali- 
ties which  determine  density,  as,  for  example,  the  dis- 
covery of  mines,  establishment  of  a  port,  or  the  opening 
of  channels  of  commerce,  or,  again,  the  creation  of  an  ad- 
ministrative center,  the  inhabitants  flow  to  that  section 
and  its  population  increases. 

67.  Malthus  and  the  Equilibrium  of  Population  and 
Wealth. — Facts  accordingly  show  the  existence  of  an  in- 
timate relation  between  the  number  of  inhabitants  and 
the  amount  of  wealth  produced  in  a  country. 

One  of  the  first  economists  who  sought  to  determine 
this  relation  precisely  was  Malthus.  He  was  struck  "with 
the  constant  tendency  which  manifests  itself  in  all  living 
beings  to  multiply  their  species  faster  than  the  means  of 
subsistence."  He  arrived  at  the  conclusion  that  the  ten- 
dency of  population  was  to  increase  in  geometrical 
ratio  whilst  often  under  the  most  favorable  conditions 
for  industry  the  means  of  subsistence  increased  only  in 
arithmetical  ratio. 

This  he  expressed  by  the  following  formula,  which 
is  known  as  the  law  of  Malthus : 


Distribution  of  Wealth  147 

Increase  of  population,  i,  2,  4,  8,  16,  32 4096 

Increase  of  means  of  subsistence,  I,  2,  3,  4,  5,  6 13 

His  deduction  was  that  unless  man  has  the  foresight 
and  will  to  voluntarily  restrain  the  growth  of  population, 
the  destruction  of  the  equilibrium  between  the  number  of 
consumers  and  the  quantity  of  things  to  be  consumed 
would  entail  social  misery  and  a  reduction  of  the  excess 
by  death. 

In  this  theory  of  Malthus  there  is  one  observation 
which  is  correct,  i.  e.,  population  has  a  natural  tendency 
to  increase;  its  increase  is  conditioned  by  its  means  of 
subsistence  and  the  sum  of  its  needs. 

But,  first :  it  is  rash  to  express  by  any  mathematical 
formula  a  relation  which  has  no  numerical  precision. 
Second,  the  formula  is  not  exact  and  the  observation  of 
facts  without  which  every  theory  of  this  kind  must  lack 
foundation,  did  not  warrant  then,  and  does  not  to-day 
warrant,  the  affirmation  that  there  exist  any  such  fatal 
diverse  tendencies. 

There  are  but  few  countries  where  the  progression 
of  population  is  such  as  Malthus  supposes.  We  may  find 
it  in  certain  new  countries  colonized  by  a  race  of  civilized 
men ;  for  example,  in  the  United  States  the  population 
has  thus  far  doubled  every  thirty  years,  i.  e.,  approxi- 
mately in  each  generation.  It  must  be  observed,  however, 
that  a  notable  part  of  this  increase  is  due  to  immigration. 

A  remarkable  increase  appears  likewise  in  Canada  and 
in  Australia.  Nevertheless  the  means  of  subsistence  and 
general  wealth  have  increased  in  these  countries  even  more 
rapidly  than  the  population. 

Even  among  savage  people  where  wealth  is  lightly  re- 
garded and  remains  stationary,  because  there  is  no  prog- 
ress in  industrial  knowledge,  death  is  not  called  upon,  as 


148  Elements  of  Political  Economy 

Malthus  supposed,  to  cut  down  an  excess  in  each  genera- 
tion, although  its  harvest  no  doubt  is  a  large  one.  Insti- 
tutions and  customs  in  such  regions  provide  an  uncon- 
scious preventative:  the  birth  rate  is  low.  There  are  no 
statistics  available  on  this  subject,  but  this  is  the  accepted 
view,  being  the  result  of  observation  on  the  part  of  a 
French  traveler  who  lived  seventeen  years  amongst  the 
rude  savages  of  Northern  Australia,  and  who  assures  us 
that  the  married  women  nurse  their  children  for  five  years, 
and  seldom  have  more  than  three  or  four  children  in  the 
course  of  their  married  lives.  In  Thibet  polyandry  serves 
the  same  object. 

It  is  accordingly  in  formulae  other  than  that  of  Mal- 
thus that  we  must  seek  the  true  experimental  laws  of  popu- 
lation. Without  entering  into  details  which  belong  to 
the  province  of  Demography,  we  may  borrow  from  the 
conclusions  of  that  science  the  following :  the  number  of 
inhabitants  which  a  territory  will  support  depends : 

1.  On  the  climate  and  soil  which  human  labor  can 
exploit,  i.  e.,  on  the  forces  of  nature. 

2.  On  the  quantity  of  capital  and  the  state  of  indus- 
trial knowledge  which  increase  the  productivity  of  labor. 

3.  On  the  extent  of  the  markets  which  permit  the 
population  to  procure  its  food  supplies  in  exchange  for 
the  products  of  its  industry. 

4.  On  the  average  of  individual  consumption  which 
in  a  given  state  of  wealth  permits  more  people  to  exist 
according  as  this  average  is  the  more  feeble. 

5.  On  the  equality  of  individual  consumption,  which, 
whilst  again  supposing  a  fixed  state  of  wealth,  permits  the 
larger  number  of  small  consumers  to  live  according  as 
the  number  of  unproductive  heavy  consumers  is  dimin- 
ished. 


Distribution  of  Wealth  149 

Over  the  first  of  these  conditions,  that  which  relates 
to  soil  and  climate,  man  can  generally  exercise  but  a  feeble 
influence. 

He  exercises  a  sovereign  influence  over  the  second  and 
third,  which  in  their  turn  exercise  a  preponderating  influ- 
ence on  population.  They  are  the  principal  causes  of 
density,  although  in  certain  cases  the  progress  of  indus- 
trial science  may  actually  diminish  the  population,  as  for 
example  in  agricultural  districts  when  agricultural  ma- 
chinery and  extensive  farming  is  introduced.  In  this  con- 
nection it  is  well  to  remember  that  there  are  different 
stages  or  periods  of  civilization,  and  that  these  periods, 
corresponding  to  the  diflferent  stages  of  knowledge  and 
capital,  allow  of  considerable  differences  in  density  of  pop- 
ulation. 

a.  The  savage  stage  in  which  the  chase  and  fishing 
support  a  small  number  of  inhabitants  per  square  mile. 

b.  The  pastoral  stage  where  the  raising  of  flocks 
support  scarcely  more  than  eight  to  ten  inhabitants  to  the 
square  mile. 

c.  The  agricultural  stage  where  the  cultivation  of 
land  with  a  small  capital  supports,  at  least  in  Europe,  from 
eighty  to  one  hundred  and  thirty  inhabitants  per  square 
mile. 

d.  The  industrial  or  commercial  stage,  where,  thanks 
to  intensive  farming  calling  for  large  capital,  and  to  the 
importation  of  additional  food  supplies,  paid  for  by  wealth 
produced  at  home,  there  may  be  many  hundred  inhabi- 
tants to  the  square  mile. 

The  growth  of  population  due  to  the  fourth  condition 
mentioned  above,  vi:^.:  low  average  of  consumption,  is 
not  desirable  for  the  reason  that  a  population  which  is 
very  numerous  because  it  consumes  little  is  a  wretched 


150  Elements  of  Political  Economy 

population.  To  increase  the  average  consumption  (pro- 
vided always  that  it  is  not  in  the  direction  of  vice),  and 
to  raise  the  standard  of  living  for  the  masses  is  one  of 
the  happiest  results  of  a  healthy  social  economy. 

The  fifth  condition  implies  that  institutions  which  cre- 
ate or  maintain  social  inequalities  impair  economic  activ- 
ity and  must  be  avoided;  but  we  must  g^ard  equally 
against  all  institutions  which  in  seeking  to  level  down, 
hinder  the  exercise  of  superior  qualities  and  arrest  and 
impair  the  sources  of  national  wealth.  They  would  de- 
feat their  own  object. 

To  the  five  conditions  enumerated  above  we  must  add : 

6.  By  virtue  of  physiological,  economic  and  social 
laws,  the  population  of  civilized  countries  has  to-day  a 
general  tendency  to  augment  by  an  excess  of  births  over 
deaths. 

7.  Besides,  in  the  centers  of  industries  where  the  ex- 
ploitation of  mines,  manufactories  and  commerce  is  active, 
the  population  is  increased  by  immigration. 

8.  As  a  rule  in  the  present  state  of  civilization,  ow- 
ing to  modern  progress  in  industrial  knowledge,  wealth 
increases  more  rapidly  than  population. 

It  has  not  always  been  thus.  In  the  past  wealth  and 
population  have  frequently  been  stationary,  or  even  retro- 
grade, and  there  are  countries  where  this  is  still  the  case 
to-day. 

9.  As  a  population  becomes  rich,  it  may  happen  that 
the  number  of  births  diminish  and  that  in  spite  of  a  dimi- 
nution in  the  death  rate  the  increase  of  population  is 
slower.  In  a  given  population,  the  richer  classes,  for  vari- 
ous reasons,  manifest  this  tendency.  The  upper  ranks  of 
society  are  nearly  always  recruited  by  the  accession  of 
those  who  have  risen  in  the  social  scale. 


Distribution  of  Wealth  151 

68.  Emigration  and  Colonisation. — Various  causes 
may  determine  emigration. 

1.  An  excess  of  population  resulting  from  a  high 
birth  rate. 

2.  Insufficient  means  of  subsistence,  which  is  fre- 
quently the  result  of  an  excess  of  population,  and  which 
impels  a  portion  of  the  inhabitants  to  seek  a  livelihood  be- 
yond the  borders  of  their  native  land. 

3.  The  prospect  of  a  better  future  in  a  foreign  land. 

4.  Political  conditions  which  render  life  intolerable 
to  certain  classes  in  their  native  land. 

5.  Facilities  of  communication  and  multiplicity  of 
relations  between  the  home  country  and  a  foreign  country, 
and  the  influence  of  public  institutions  on  private  enter- 
prise which  in  the  home  country  fosters  emigration,  and 
in  the  foreign  country  attracts  immigration. 

The  first  two  causes  impel  especially  the  poorest  to 
emigrate,  and  ordinarily  they  operate  with  more  energy 
in  times  of  crisis  and  want  than  in  prosperous  times. 

The  prospect  of  a  better  future  draws  individuals  from 
different  classes,  especially  from  the  middle  class.  It  in- 
volves no  element  of  suffering;  but  it  operates  upon  a 
relatively  restricted  number  of  individuals  because  those 
who  already  have  a  certain  position  in  their  own  land  are 
less  ready  to  quit  it. 

The  fourth  condition  is  accompanied  by  violence  and 
moral  suffering;  nevertheless  it  has  been  the  origin  of 
more  than  one  flourishing  colony  when  it  has  led  to  the 
transfer  to  a  new  country  of  men  having  moral  and  intel- 
lectual qualities  suited  to  form  a  stable  society. 

The  fifth,  which  is  to-day  one  of  the  most  powerful, 
has  done  much  to  increase  and  regulate  the  current  of 


152  Elements  of  Political  Economy 

emigration,  and  one  might  even  say,  to  give  it  a  moral 
character. 

We  may  distinguish  countries  towards  which  emigra- 
tion flows  as  old  and  new. 

The  old  countries  are  those  where  the  land  being  en- 
tirely appropriated  and  cultivated,  the  immigrant  is  at- 
tracted by  something  other  than  the  prospect  of  landed 
property.  Between  the  old  countries  there  exist  particu- 
lar currents  determined  by  private  interests,  and  which 
take  to  most  every  country  men  of  almost  every  other 
country. 

There  are  likewise  currents  of  immigration  which 
may  be  called  general  currents.  One  of  these  is  from 
countries  advanced  in  civilization  to  newer  countries.  It 
consists  of  emigrants  seeking  a  better  future;  men  who 
devote  themselves  principally  to  commerce  and  to  the  lib- 
eral professions.  Another  sets  in  from  countries  where 
the  population  is  dense  and  capital  inadequate  to  countries 
where  capital  is  more  abundant  than  labor ;  these  latter 
emigrants  are  largely  wage  earners. 

To  obstruct  these  currents  by  laws  is  to  hinder  eco- 
nomic progress  because  it  is  always  of  advantage  that 
capital  and  labor,  which  constantly  seek  each  other,  should 
meet. 

A  state  which  arrests  emigration  attacks  individual 
liberty  and  condemns  a  portion  of  its  citizens  to  a  life  of 
wretchedness. 

A  state  which  hampers  immigration  is  curtailing  free- 
dom of  contract  and  hindering  the  growth  of  the  nation's 
capital.  From  a  high  political  standpoint  it  is  better  that 
a  nation  should  be  able  to  satisfy  the  new  demands  for 
labor  which  an  increase  of  its  capital  calls  for  by  a  natural 
increase  of  its  own  population ;  but  if  that  condition  is 


Distribution  of  Wealth  153 

not  realizable  the  blame  for  immigration  must  be  laid  at 
the  door  of  an  inadequate  birth  rate.^ 

Immigration  into  new  countries  is  closely  connected 
with  the  question  of  colonization.  Most  frequently  it  is 
really  the  hope  of  acquiring  land  and  a  new  home  that  at- 
tracts immigrants.  This  is  true  even  of  those  who  at  first 
have  only  the  prospect  of  wage-earners.  The  emigrant's 
preference  is,  consequently,  for  countries  of  the  greatest 
natural  wealth  (mines  and  rich  lands  not  as  yet  wholly 
appropriated). 

This  tendency  is  on  the  whole  a  gain  for  humanity 
for  the  reason  that  it  results  in  the  utilization  of  a  greater 
quantity  of  natural  wealth  and  leads  civilized  men  to  take 
more  complete  possession  of  the  earth.  It  is  good  for  the 
emigrants.  They  do  not  all  succeed,  but  many  of  them 
establish  households,  living  in  more  comfort  than  they  en- 
joyed in  their  native  land. 

From  both  a  political  and  economic  standpoint  it  is  a 
gain  for  the  new  country  which  lacked  the  labor  and  capi- 
tal to  develop  its  natural  resources. 

It  is  likewise  a  gain  for  the  state  whence  the  emigrants 
depart.  If  the  new  country  is  one  of  its  own  colonies,  the 
gain  for  the  state  is  direct;  if  not  there  is  still  an  indirect 
gain,  for  the  reason  that  the  sole  fact  of  a  new  coloniza- 
tion enlarges  commerce,  and  the  spread  of  a  people  carry- 
ing with  them  the  language  and  customs  of  a  particular 
nation  benefit  in  a  special  manner  the  commerce  of  that 
nation.    The  influence,  both  political  and  economic,  of  the 

'The  juxtaposition  in  the  same  country  of  races  which  it  is  gen- 
erally difficult  to  mix,  is  not  desirable  because  it  leads  to  race  con- 
flicts, and  when  a  mixture  does  occur,  the  result  as  a  rule  is  degen- 
eracy. On  the  other  hand,  a  mixture  of  different  nationalities 
belonging  to  the  same  race  is  generally  regarded  as  beneficial. — 
Translator. 


154  Elements  of  Political  Economy 

home  country  is  thus  extended  by  the  multitude  who  go 
out  from  it. 

It  is  by  colonization  that  the  races  of  Europe  have 
spread  since  the  discovery  of  America.  Nearly  the  whole 
of  North  America  between  the  52d  and  22d  parallels  has 
been  occupied  by  them.  They  have  mixed  with,  or  partly 
supplanted  the  indigenous  race  in  the  tropical  and  sub- 
tropical zone  of  both  North  and  South  America.  They 
have  peopled  Southern  Africa  and  a  portion  of  the  region 
bordering  on  the  Mediterranean,  they  have  established 
dominion  over  India,  over  a  portion  of  Indo-China,  Ma- 
lasia  and  Siberia,  and  in  the  nineteenth  century  have  cre- 
ated a  new  center  of  civilization  in  Australia.  To-day  we 
may  estimate  at  more  than  lOO  millions  the  representa- 
tives of  European  races,  pure  or  mixed,  living  outside  of 
Europe.  It  is  easy  to  realize  what  a  grand  influence  this 
diffusion  of  European  blood  has  had  on  the  wealth  of 
Europe  itself,  on  that  of  the  world  generally,  and  what 
changes  it  has  brought  about  in  the  political  power  of  races 
and  states. 

69.  Poverty  and  Pauperism. — In  all  societies  there 
are  some  individuals  who  are  needy,  i.  e.,  unable  to  pro- 
cure by  their  labor,  income  or  family  aid,  the  necessaries 
of  life — food,  clothing  and  lodging.  These  are  the  in- 
digent. '    ■; 

We  must  not  confuse  the  poor  and  the  indigent,  pov- 
erty and  pauperism.  The  first  have  little,  and  the  second 
are  in  actual  need.  The  condition  of  poverty  is  bearable, 
and  there  are  human  societies  nearly  all  of  whose  members 
are  poor,  such  as  savages.  Indigence,  or  want,  on  the 
other  hand,  means  suffering,  because  it  is  the  denial  of 
things  necessary  to  existence,  and  it  may  become  intoler- 
able.  Want  is  quite  the  exception  in  society;  nevertheless 


Distribution  of  Wealth  155 

a  large  portion  of  the  population  may  sometimes  sink  into 
it.  This  is  witnessed  in  times  of  famine  such  as  still  occur 
in  India,  and  in  Europe  has  sometimes  followed  as  a  con- 
sequence of  long  wars. 

When  want  is  not  the  exception,  but  the  permanent 
condition  of  a  large  portion  of  the  population  whom  it 
fastens  upon  as  a  plague,  it  constitutes  pauperism.  The 
evil  is  an  old  one,  but  it  has  assumed  a  character  of  peculiar 
intensity  in  the  industrial  societies  of  the  present  epoch. 
Tt  has  stimulated  scientific  research  and  charity  to  such  a 
point  that  one  is  apt  to  believe  it  is  something  new,  like 
the  word  that  designates  it.  The  fact  is,  however,  that  in 
previous  centuries  the  numerous  alms-houses  and  hospitals 
created  by  Christian  charity  were  by  no  means  empty. 
Medicants  swarmed  in  the  country,  and  the  towns  were  in- 
fested with  vagrants  whom  the  police  ran  down  without 
succeeding  in  destroying  the  species.  In  proportion  to  the 
inhabitants  there  were  more  needy  and  many  more  beg- 
gars in  London  and  Paris  in  the  eighteenth  century  than 
there  are  to-day. 

Pauperism  sometimes  appears  amongst  the  rural  popu- 
lations; Ireland  aflfords  an  example  of  this.  More  fre- 
quently, though,  it  attacks  the  populations  of  cities,  and 
especially  of  manufacturing  cities  where  the  working  class 
is  massed,  and  where  the  conditions  of  life  are  made  more 
difficult  by  the  high  price  of  food,  by  crowding,  and  the 
unsanitary  conditions  of  lodgings ;  by  occasional  depres- 
sion in  certain  industries,  by  the  temptation  to  spend 
money,  and  finally  by  the  proximity  and  the  contrast  of 
wretchedness  and  luxury.  Want  is  really  a  relative  thing. 
In  a  country  where  everybody  is  poor,  one  resigns  himself 
to  live  on  very  little,  and  does  not  complain.  Where  there 
is  a  display  of  wealth  this  little  appears  entirely  too  little. 


156  Elements  of  Political  Economy 

and  charity  assumes  the  duty  of  adding  something.  Most 
of  the  needy  in  London,  Paris  or  New  York  would  not 
consent  to  live  on  the  average  rations  of  a  Hindoo  or 
Chinese. 

Now  that  society  produces  more  wealth  than  formerly, 
a  state  of  well-being  is  more  general  and  there  is  less 
wretchedness.  What  has  come  about  is  that  pauperism  is 
more  apparent  and  more  concentrated,  like  industry  itself. 
It  resembles  certain  corporal  ills  whose  danger  has  been 
lessened  by  progress  in  the  science  of  medicine,  but  which 
cannot  be  suppressed  any  more  than  religion  and  morality 
can  entirely  suppress  vice. 

There  are  different  classes  of  the  needy. 

First,  those  who  having  but  limited  resources,  and  be- 
ing dependent  upon  their  labor,  sink  accidentally  into  want 
when  work  is  lacking. 

Second,  those  who  have  too  small  an  income,  and  too 
numerous  a  family;  whilst  having  constant  employment 
they  are  nevertheless  in  a  continued  state  of  half-want, 
and  obliged  to  resort  to  charity. 

Third,  those  who  are  in  a  state  of  absolute  need,  being 
incapable  of  work ;  such  are  abandoned  children  and  the 
infirm  and  aged  who  are  without  resources. 

Fourth,  those,  who  whilst  of  sound  health,  are  too 
lazy  or  too  vicious  to  earn  a  livelihood  and  who  prefer  to 
beg  or  steal. 

We  expect  to  find  the  first  two  classes  numerous  in 
great  centers  of  population  and  industry  because  these 
embrace  many  who  live  on  wages.  Those  of  the  third 
class  most  frequently  come  from  families  of  the  second 
class,  and  are  consequently  found  in  the  same  localities. 
From  all  classes  of  society,  and  especially  from  classes  ex- 
posed to  want,  vice  constantly  gathers  its  victims,  and 


Distribution  of  Wealth  157 

plunges  perverse  individuals  into  the  social  depths.  The 
wretched  whom  the  great  city  itself  has  produced  and 
those  who  come  to  it  from  every  direction  thaf  they  may 
be  lost  in  its  crowds,  and  find  there  a  greater  opportunity 
to  satisfy  their  bad  instincts,  wallow  in  this  mire  of  evil. 

Those  who  are  in  a  state  of  wretchedness  through  no 
fault  of  vice  sometimes  obey  the  same  law  of  attraction, 
and  quit  their  firesides  for  large  centers  of  population 
where  they  hope  to  obtain  more  assistance — assistance  at- 
tracts the  indigent.  It  is  this  sitiAation  that  imposes  on  the 
great  cities  especial  obligations  of  charity  and  police. 

70.  Assistance. — With  respect  to  pauperism,  that 
which  above  all  distinguishes  civilized  and  rich  societies 
from  backward  and  poor  societies  is  that  they  study  the 
evil  and  having  greater  resources,  can  better  apply  rem- 
edies. The  historian,  Macaulay,  has  justly  remarked : 
"The  truth  is  that  misery  is  ancient ;  that  which  is  new  is 
the  intelligence  which  discovers  it,  and  the  humanity  which 
relieves  it." 

,  It  may  be  remarked,  however,  that  in  all  times  and  in 
all  states,  a  portion  of  the  national  revenue  has  been  con- 
sumed in  works  of  charity.  But  this  charity  consumption, 
or  consumption  with  a  view  to  assistance,  is  naturally 
much  larger  in  rich  societies  because  they  can  afford  it. 

Most  consumption  of  this  kind  must  be  grouped  under 
unproductive  consumption. 

Is  it  a  good  or  an  evil  ?  The  question  has  l)een  asked, 
it  must  be  answered. 

The  first  answer  that  rises  to  one's  lips  is  that  in  a 
general  manner  it  imposes  itself  as  a  moral  and  social 
necessity.  By  a  natural  sentiment  of  sympathy  the  man 
who  has  something  is  led  to  relieve  the  wretchedness  of 
the  man  who  has  nothing.     Furthermore,  a  consideration 


158  Elements  of  Political  Economy 

for  public  order  leads  society  to  lessen  the  suffering  of  its 
members. 

Morality  proclaims  it  to  be  man's  duty  to  assist  his 
fellows. 

Political  economy  adds : 

First — Indig-ence  has  no  positive  right  to  assistance 
because  no  one  has  a  right  to  claim  for  himself,  or  to  con- 
sume without  permission,  the  property  of  another ;  this  is 
a  corollary  to  the  right  of  property.  It  is  wrong  to  say 
that  the  state  is  obliged  to  support  the  needy  because  of  the 
injury  which  it  inflicts  in  not  permitting  them  to  gather 
the  natural  fruits  of  the  earth.  The  social  state  is  not 
detrimental  to  wealth.  On  the  contrary,  it  facilitates  its 
increase,  and  consequently,  helps  anyone  who  wishes  to 
work,  and  can  work,  to  acquire  a  portion  of  it. 

Second — Individuals  and  society  make  a  generous  use 
of  wealth  in  employing  a  part  of  it  unproductively  to  assist 
the  indigent ;  in  so  doing  they  at  the  same  time  serve  the 
public  interest. 

Some  economists  have  reproached  charity  with  en- 
couraging and  spreading  the  plague  of  pauperism  instead 
of  correcting  it.  It  is  certain  that  indiscriminate  alms-giv- 
ing encourages  laziness  and  vice  and  diminishes  the  in- 
centive to  work  on  the  part  of  the  poor,  i.  e.,  impairs  their 
vigor  by  the  prospect  of  a  life  of  ease  and  idleness.  The 
poor  law  of  England  as  formerly  framed,  and  similar 
regulations  still  existing  in  France,  are  open  to  this  charge. 

In  England  the  chief  harm  was  done  by  the  enactment 
of  1796,  legalizing  a  practice,  which  had  sprung  up  in  pre- 
vious years,  of  permitting  justices  to  order  relief  from  the 
rates  to  the  industrious  poor  whose  wages  were  deemed 
inadequate;  i.  e.,  wages  were  supplemented  by  public  aid. 
The  practice  continued  through  a  period  of  forty  years. 


Distribution  of  Wealth  159 

As  a  minimum  income  was  assured  the  laborer  ad- 
justed to  the  size  of  his  family,  it  mattered  Httle  what  his 
wages  were,  and  in  consequence  employers  were  able  to 
secure  labor  at  lower  and  lower  wages,  suffering  the  parish 
allowance  to  continually  increase.  Industry  and  thrift 
were  impaired,  lawlessness  increased,  the  rates  rose  until 
land  went  out  of  cultivation,  production  fell  off  and  whole 
communities  became  impoverished. 

For  example,  in  1831,  under  the  old  law,  "out  of  98 
who  had  a  settlement  in  the  parish  of  Cholesbury,  Bucks 
(the  total  population  being  127)  there  were  64  in  receipt 
of  relief,  and  the  poor  rates  alone  exceeded  24s.  in  the 
pound"  {i.  e.,  swallowed  up  the  rental).  "As  a  result  the 
glebe  (church  lands)  as  well  as  all  the  land  in  the  parish 
save  some  sixteen  acres,  was  thrown  out  of  cultivation 
and  the  parish  had  to  exist  for  some  time  by  means  of 
rates  in  aid  levied  on  other  parishes  in  the  hundred." 
After  the  reform  of  the  poor  law  the  condition  of  the 
parish  improved  until  by  1889  it  was  in  a  fairly  prosperous 
condition,  not  one  of  the  parishioners  "being  in  receipt  of 
relief  from  the  rates." 

Generally  speaking,  constant  aid  to  able  men  and 
women  which  is  in  the  nature  of  a  tax  on  the  possessions 
of  others  is  an  evil.  We  must  not  be  led  by  the  abuse  of 
charity,  however,  to  condemn  all  charity.  Exercised  in- 
telligently, it  is  a  legitimate  and  useful  sort  of  distribution. 
It  modifies  for  some  the  extreme  inequalities  of  fortune; 
it  lessens  the  hardships  which  fate  often  imposes  even 
upon  the  worthy,  and  may  even  preserve  to  society  some 
of  its  productive  force.  This  is  the  pronouncement  of 
political  economy. 

The  most  effective  charity  is  that  which  takes  the  form 
of  prevention.     It  may  either  assist  the  young  by  with- 


i6o  Elements  of  Political  Economy 

drawing  them  from  destitution  or  vice  and  rearing  them 
in  happier  surroundings,  or  assist  adults  by  saving  them 
from  threatened  wretchedness.  Such  charity  actually 
diminishes  pauperism. 

Assistance  is  given : 

First,  by  individuals  in  their  own  name,  impelled  by 
sentiments  of  religion  or  sympathy;  much  assistance  is 
given  in  this  way  which  never  figures  in  statistics. 

Second,  by  charitable  associations  depending  for  their 
support  on  voluntary  contributions  or  private  endowment. 

Third,  by  public  bodies  such  as  the  state  or  local  gov- 
ernment, whose  fund  for  this  purpose  is  derived  either 
from  private  benevolence  or  from  taxation. 

Public  assistance  represents  the  part  society  plays  in 
relieving  want ;  its  action  is  more  general  and  more  regu- 
lar, but  less  delicate,  than  that  of  private  charity.  It  is  in 
connection  with  this  form  of  charity  that  questions  of  the 
right  and  extent  of  charity  arise.  Although  the  needy 
have  no  established  right  to  assistance,  it  must  be  ad- 
mitted that  the  state,  charged  with  the  care  of  the  public 
interest,  simply  fulfills  a  social  duty  in  coming  to  the  relief 
of  certain  unfortunates  when  its  resources  permit  it  to  do 
so.  In  England  the  state  undertakes  the  relief  of  the  desti- 
tute, leaving  relief  of  poverty  to  voluntary  effort. 

Private  and  public  assistance  may  be  given  under  dif- 
ferent forms  and  circumstances. 

First,  in  hard  times,  in  the  form  of  work  in  public 
workhouses  where  the  unemployed  are  received.  This 
may  produce  good  or  bad  results  according  to  the  way  in 
which  the  shops  are  managed ;  its  results  have  been  only 
moderately  good  in  the  English  workhouses,  and  in  the 
national  workshops  of  1848  in  France  they  were  unmis- 
takably bad. 


Distribution  of  Wealth  i6i 

Second,  assistance  may  be  in  the  form  of  money  or 
supplies.  It  may  be  temporary  and  accidental,  as  in  the 
case  of  men  deprived  of  employment  by  hard  times,  or  in 
the  case  of  the  poor  suffering  momentarily  from  famine 
or  a  severe  winter,  or  it  may  be  regular  and  permanent, 
as  in  the  case  of  individuals  and  families  incapable  of  sup- 
plying their  ordinary  wants.  Generally  it  constitutes  only 
a  small  portion  of  the  needs  of  the  indigent.  Outdoor  re- 
lief should  be  given  only  at  the  home  of  the  recipient  where 
his  true  needs  can  be  more  correctly  ascertained. 

Third,  in  asylums  and  hospitals  where  the  sick  and 
helpless  are  cared  for.  This  is  one  of  the  most  necessary 
forms  of  assistance,  and  a  form  of  consumption  which 
may  become  productive  especially  when  it  concerns  chil- 
dren whom  it  aims  to  save  from  death  and  vice. 

Fourth,  under  the  form  of  procuring  the  privileges  of 
asylums,  schools,  or  benefit  societies.  This  is  another  kind 
of  charity  consumption  which  may  be  productive. 

The  chief  aims  of  charity  work  should  be  to  strengthen 
character,  inspire  hope  and  resolution,  encourage  good 
habits,  and  seek  to  enlarge  opportunity.  Amongst  the 
means  resorted  to  to  accomplish  these  ends  none  are  more 
effective  than  friendly  visiting  which  keeps  the  charity 
worker  in  close  touch  with  the  subject. 

Indiscriminate  alms-giving  is  an  admitted  evil.  The 
person  who  practices  it  is  a  public  enemy  who  in  the  long 
run  distinctly  adds  to  the  sum  of  human  misery.^ 

^  A  most  useful  modern  development  of  charity  administration  is 
the  central  society,  called  a  charity  organization  society,  which 
regulates  relief.  The  society  itself  dispenses  little  material 
assistance,  but  confines  its  efforts  to  furnishing  information  to 
societies  that  do,  to  ascertaining  the  true  needs  of  the  poor,  to 
devising  ways  of  meeting  these  needs,  to  discovering  fraud  and 
duplication  of  aid,  and  above  all,  to  making  friendly  visits.  The 
II 


i62  Elements  of  Political  Economy 

Resume 

There  is  a  close  relation  between  the  three  terms, 
Population,  Production  and  Consumption. 

General  laws  of  the  equilibrium  of  wealth  and  popula- 
tion :  when  production  and  capital  increase,  population  has 
a  tendency  to  increase;  when  the  average  of  individual 
consumption  increases  population  has  a  tendency  to  be- 
come stationary ;  when  all  the  land  in  a  country  is  occupied 
and  cultivated,  an  increase  of  population  becomes  more 
difficult. 

The  density  of  population  in  different  parts  of  the 
world  is  proportional  to  the  means  of  subsistence  found 
there.  Valleys,  arable  plains,  seacoasts,  highways  of  com- 
merce, mines,  and  the  motor  forces  of  nature  favor  the 
formation  of  dense  populations.  Big  cities  offer  oppor- 
tunities of  livelihood  which  make  them  special  centers  of 
attraction. 

Population  has  a  natural  tendency  to  increase.  Its 
increase  is  conditioned  by  the  means  of  subsistence  and  the 
sum  of  its  needs. 

The  experimental  laws  of  population :  The  number 
of  inhabitants  a  territory  will  support  depends  upon  the 
physical  conditions  of  soil  and  climate,  on  capital  and  in- 
dustrial knowledge,  on  the  average  of  individual  consump- 
tion, and  on  the  degree  of  equality  in  this  consumption. 
With  respect  to  density  we  may  distinguish  between  the 
savage  stage,  pastoral  stage,  agricultural  stage,  and  the 
industrial    and    commercial    stage.     Population    has    a 

value  of  such  a  society  in  large  centers  of  population  cannot  be 
overestimated.  Its  existence  means  cooperation  in  the  relief 
work  of  the  community.  The  attack  on  poverty  becomes  an 
organized  attack.  The  local  problem  of  relief  comes  to  be 
regarded  as  a  whole,  and  in  the  solution  of  this  problem  the 
experience  of  other  communities  is  more  likely  to  be  brought  to 
bear. — Translator. 


Distribution  of  Wealth  163 

natural  tendency  to  increase  by  an  excess  of  births  over 
deaths.  In  industrial  centers  it  is  further  increased  by 
immigration.  In  civiHzed  countries  to-day  wealth  is  in- 
creasing faster  than  population.  The  acquisition  of  wealth 
by  a  people  often  lessens  the  people's  rate  of  increase. 

The  principal  causes  of  emigration  are,  excess  of  popu- 
lation, deficient  means  of  subsistence,  the  prospects  of  a 
better  future,  certain  political  conditions,  and  facilities  of 
communication. 

The  currents  of  immigration  are  from  countries  more 
advanced  in  civilization  to  those  less  advanced,  or  from 
countries  having  relatively  more  inhabitants  than  capital 
to  countries  having  more  capital  than  labor. 

Immigration  into  new  countries  and  colonization  are 
a  gain  for  the  immigrants  themselves,  for  the  new  country 
which  receives  them,  for  the  old  country  which  they  have 
left,  and  for  humanity. 

There  is  less  misery  in  modern  societies  than  in  former 
societies,  but  pauperism  is  more  conspicuous  and  more 
concentrated. 

The  indigent  are  those  who  find  it  impossible  to  pro- 
cure the  necessaries  of  life.  In  this  class  are  included 
those  who  plunge  momentarily  into  want,  those  who  are 
in  a  permanent  state  of  half-want,  and  those  whom  vice  or 
physical  defects  keep  from  work  and  who  are  in  complete 
want. 

Charity  consumption  relieves  want.  Although  the 
needy  have  no  established  right  to  assistance,  intelligent 
charity  is  a  legitimate  and  useful  sort  of  distribution  in  so- 
ciety. Charitable  assistance  is  given  by  individuals,  by 
associations,  and  by  public  bodies.  The  state  which  is 
charged  with  the  public  interest  fulfills  a  duty  in  assisting 
certain  unfortunates  when  its  resources  permit. 


164  Elements  of  Political  Economy 

Assistance  is  given  through  the  agency  of  workhouses, 
asylums  and  hospitals,  or  may  take  the  form  of  outdoor 
relief.  Another  form  is  that  which  procures  certain  priv- 
ileges for  the  needy  in  asylums,  schools  or  benefit  societies. 


PART  III 

THE  CIRCULATION  OF  WEALTH 
I 

EXCHANGE  AND  VALUE 

71.  Exchange.  72.  Offer  and  Demand,  Competition  and  Mo- 
nopoly, yz-  Fundamental  Conditions  of  Value.  74.  Causes  of  Va- 
riation of  Value.  75.  Distinction  Between  Value  and  Wealth.  76. 
Prices. 

71.  Exchange. — In  civilized  society  there  is  scarcely 
any  production  which  is  not  accompanied  by  exchange. 
The  simple  phenomenon  of  wages  involves  an  exchange  of 
labor  for  capital.  We  can  conceive  of  production  without 
exchange  but  it  is  only  a  Robinson  Crusoe,  isolated  from 
the  rest  of  mankind,  who  produces  and  does  not  exchange 
products.  Production  and  consumption  are  nevertheless 
the  two  sole  economic  phenomena  absolutely  necessary  to 
human  life.  They  constitute  the  principle  and  the  end  of 
economic  evolution.     Exchange  is  an  intermediate  phase. 

Let  us  seek  to  define  the  different  kinds  of  exchange. 

I.  Paul  is  a  hunter,  Peter  a  fisherman.  Isolated,  they 
are  reduced  to  one  kind  of  food,  which  may  become 
monotonous.  If  they  were  guided  by  reciprocal  interests 
and  traded  with  each  other,  they  might  both  procure  more 
varied  food  without  additional  labor.  'T  have  spent  my 
morning  in  catching  a  string  of  fish,"  says  Peter;  "y*^u 
have  spent  yours  in  killing  a  hare — I  have  other  fish,  you 
have  other  game,  let  us  exchange ;  give  me  a  hare  for  my 

165 


1 66  Elements  of  Political  Economy 

dozen  fish,  and  each  of  us  will  have  on  his  table  both  fish 
and  meat." 

The  elementary  form  of  exchange  is  to  surrender  a 
product  in  order  to  procure  an  equivalent  product.  If  by 
the  side  of  Peter  and  Paul  there  lived  John  the  carpenter, 
and  Simon  the  potter,  the  nature  of  their  relations  would 
not  have  changed  although  these  relations  would  have  be- 
come a  little  more  complex.  John  cannot  eat  his  stock  of 
wood  any  more  than  Simon  can  consume  what  he  pro- 
duces; but  John  would  build  and  keep  in  repair  Peter's 
and  Paul's  cabins  since  he  is  more  skillful  in  the  use 
of  carpenter's  tools.  Peter  and  Paul  would  surrender 
to  him  in  exchange  a  portion  of  their  fish  and  game.  The 
amount  they  surrendered  would  depend  upon  the  work  he 
supplied,  and  would  be  governed  by  an  agreement  pre- 
viously entered  into  between  them.  In  the  same  way 
Simon  would  furnish  household  utensils  to  his  neighbors, 
who  would  in  turn  build  his  hut  and  supply  him  with 
food. 

If  there  were  only  four  of  them  the  transactions  would 
not  be  numerous  enough  for  each  to  live  on  a  special  in- 
dustry, particularly  John  and  Simon.  They  would  be 
under  the  necessity  of  giving  to  their  special  callings  only 
a  portion  of  their  time,  and  use  the  rest  directly  in  procur- 
ing other  necessaries.  This  is  what  we  still  see  amongst 
civilized  peoples  in  connection  with  a  large  number  of  in- 
dustries in  the  country  which  certain  individuals  practice 
concurrently  with  the  cultivation  of  the  land.  If  there 
were  100,000  people,  John  and  Simon  would  always  be 
occupied  at  carpentry  and  pottery,  and  could  supply  all 
their  needs  by  exchange. 

When  products  are  exchanged  for  money  the  transac- 


The  Circulation  of  Wealth  167 

tion  is  a  sale ;  when  exchanged  for  other  products,  the  pay- 
ment is  said  to  be  "in  kind." 

2.  Another  person  arrives  on  the  scene,  Charles,  who 
establishes  a  carpentry  opposite  that  of  John ;  but  Charles 
is  young,  he  has  less  experience  and  less  capital  than  his 
competitor.  He  lacks  tools,  and  wood,  and  his  work  has 
not  the  same  finish.  In  consequence  of  this  he  runs  the 
risk  of  being  idle  a  large  part  of  his  time  and  of  starving. 
"Will  you  exchange  your  day's  labor  for  an  assured  liv- 
ing?" says  John.  "If  so  we  will  work  together.  I  will 
lend  you  a  portion  of  my  tools,  will  gitide  you  in  your  in- 
experience, and  let  you  execute  under  my  direction  work 
which  has  been  confided  entirely  to  me  and  which  would 
probably  not  come  to  you.  So  long  as  the  conditions  we 
lay  down  are  reciprocally  agreeable,  your  labor  will  belong 
to  me  for  a  certain  number  of  hours.  In  exchange,  you 
will  receive  from  me  a  certain  quantity  of  products  either 
in  kind  or  in  money."  This  arrangement  proves  mutually 
beneficial,  affording  Charles  regular  work  and  a  livelihood, 
and  John  an  ability  to  undertake  more  and  earn  more  him- 
self, whilst  at  the  same  time  remunerating  his  companion. 
This  is  an  exchange  of  labor  for  product,  a  subject  already 
discussed  in  connection  with  the  wage  system. 

3.  The  above  are  the  two  most  salient  forms  of  ex- 
change, but  they  are  not  the  only  ones. 

If  John  has  built  for  himself  a  larger  house  than  his 
personal  needs  require,  he  may  surrender  a  portion  of  it 
to  Simon,  saying  to  him :  "It  will  cost  you  too  much  to 
build  a  separate  house;  you  can  easily  find  lodging  here 
in  mine.  I  have  no  intention  of  dispossessing  myself  of 
that  which  is  mine,  nor  of  giving  you  any  portion  of  my 
property;  but  I  will  cede  to  you  for  a  given  time  the  use 


1 68  Elements  of  Political  Economy 

of  a  portion  of  the  property  if  you  are  willing  to  pay  me  a 
just  price  for  it.  You  will  be  exchanging  your  product, 
whether  pottery  or  money,  for  the  temporary  enjoyment 
of  what  is  mine."  That  which  results  is  a  contract  to  rent ; 
i.  e.,  the  exchange  of  a  product  for  the  temporary  enjoy- 
ment of  another  product. 

4.  John  has  lots  of  work  and  no  time  to  devote  to  the 
details  of  living  and  personal  comfort;  he  accordingly 
takes  a  servant  and  agrees  to  give  him  his  maintenance  and 
certain  wages  per  month  in  exchange  for  personal  services. 
This  is  the  exchange  of  products  for  regular  services. 

If  John  is  taken  sick  he  calls  for  a  physician.  For  the 
instruction  of  his  boy  he  summons  a  teacher.  This  phy- 
sician and  this  teacher  he  pays  by  exchanging  products 
against  services.  If,  however,  the  physician  builds  a  house 
and  makes  use  of  John's  architectural  knowledge,  it  may 
be  paid  by  the  exchange  of  one  service  against  another 
service. 

Men  accordingly  exchange  products  against  products, 
products  against  services,  or  one  service  against  another 
service.  Now  what  is  a  product?  It  is  the  result  of  labor, 
and  the  product  itself  is  worth  only  the  quantity  of  utility 
that  resides  in  it.  We  are  led  to  procure  it  by  exchange 
only  because  of  its  supposed  utility.  Going  to  the  root  of 
the  matter,  this  is  nothing  less  than  the  service  which  the 
creator  of  the  product  renders  us  through  the  instrumen- 
tality of  the  product.  In  reality,  we  then  buy  a  certain 
service  whose  principal  source  is  in  the  labor  of  one  or 
more  men.  Thus  the  employer  buys  the  service  of  the 
workman,  and  the  master  that  of  his  servants.  Thus  it  is, 
likewise,  that  every  man  who  secures  any  product  whatso- 
ever really  secures  the  services  of  another.     All  modes  of 


The  Circulation  of  Wealth  169 

exchange  can  accordingly  be  summed  up  in  the  formula, 
services  are  exchanged  against  services. 

y2.  The  Law  of  Offer  and  Demand,  Competition  and 
Monopoly. — By  what  rules  does  exchange  take  place? 
This  question  can  only  be  answered  by  an  observation  of 
social  facts,  but  the  answer  differs  in  different  cases. 

Exchange  results  from  freedom  of  contract.  Without 
freedom  of  contract  we  might  have  a  distribution  of 
wealth,  but  could  not  have  exchange.  Thus  a  master 
formerly  gave  to  his  slaves  food  and  clothing,  i.  e.,  wealth 
to  be  consumed,  and  he  set  them  certain  tasks.  This  was 
distribution  by  authority;  it  was  not  exchange.  On  the 
other  hand,  the  slave  who,  with  his  master's  money,  or 
with  his  own  money,  bought  vegetables  in  the  market 
performed  an  act  of  exchange.  In  the  same  way  a  father 
who  supports  his  children  and  makes  them  work  is  not 
performing  an  act  of  exchange  unless  he  has  entered  into 
a  special  agreement  to  compensate  them  for  their  labor. 
He  is  simply  distributing  wealth  by  an  act  of  authority. 
If  a  free  system  of  exchange  is  to  exist  the  parties  must  be 
privileged  to  discuss  the  terms  of  the  contract. 

If  this  discussion  of  the  terms  is  to  be  serious  and  the 
conditions  arrived  at  are  not  to  be  prejudicial  to  either 
party  it  is  necessary  that  there  should  be  competition. 
(See  par.  44).  This  means  that  the  market  must  be  suffi- 
ciently wide  to  permit  of  several  persons  offering  and  sev- 
eral demanding  the  same  product  of  labor  at  the  same  time 
and  in  the  same  place.  It  is  only  then  that  conflicting 
interests  find  their  equilibrium,  and  that  the  law  of  offer 
and  demand  produces  its  important  results. 

I .  Let  us  first  take  an  example  of  a  transaction  where 
competition  has  not  yet  appeared.  Ten  men  are  ship- 
wrecked on  a  rock  a  sufficient  distance  from  the  coast 


170  Elements  of  Political  Economy 

to  preclude  all  hope  of  succor  so  long  as  the  storm  con- 
tinues. They  are  cold  and  hungry.  One  of  them  has  a 
supply  of  biscuits  and  a  bottle  of  liquor;  he  is  willing  to 
surrender  a  part  of  them.  But  at  what  price?  All  his 
unfortunate  companions  compete  for  the  food  which  can 
keep  them  alive  until  help  arrives,  and,  if  necessary,  they 
will  give  all  they  possess  in  exchange  for  it. 

A  short  distance  from  this  spot  appear  some  country- 
men who  have  brought  to  the  village  market  a  considerable 
quantity  of  ripe  fruit  which  would  soon  spoil  if  they  car- 
ried it  home  again.  There  are  but  few  purchasers,  per- 
haps only  one.  This  man  can  obtain  the  quantity  of  fruit 
he  desires  at  a  very  low  price  because  each  vendor  is  offer- 
ing fruit,  and  probably  prefers  to  realize  from  his  product 
a  small  remuneration  rather  than  lose  the  whole  product. 

In  each  of  these  cases  one  of  the  parties  is  injured.  In 
the  first  it  is  the  purchasers  who  suffer,  and  in  the  second 
the  sellers,  because  of  having  been  compelled  to  submit  to 
the  conditions  imposed.  This  is  what  happens  under  a 
monopoly  where  restricted  offer  causes  an  elevation  in 
price  and  this  latter  in  turn  serves  to  lessen  demand.  Un- 
controlled monopolies  are  accordingly  to  be  avoided. 

2.  Turn  now  to  the  case  where  competition  is  ap- 
proximately complete  and  unlimited.  Nothing  is  more 
easy  to  picture  than  unlimited  competition  amongst  buy- 
ers, provided  the  population  is  sufficiently  numerous. 
Most  men  seek  to  procure  the  greatest  possible  number 
of  satisfactions,  and  their  consumption  is  limited  only  by 
their  resources.  This  limit  is  the  more  quickly  attained 
as  the  products  sought  become  dearer. 

In  this  case  the  market  for  the  goods  depends  on  their 
price;  otherwise  stated,  on  the  opportunity  the  seller  gives 
to  the  buyer  to  acquire  the  goods. 


The  Circulation  of  Wealth  171 

Let  us  picture  a  population  built  up  after  the  fashion 
of  a  pyramid,  each  layer  of  the  pyramid  being  formed  of 
persons  having-  uniform  revenue,  the  richest  at  the  top, 


Ibooo 

6Q000 

135  OOP 

250000 

the  poorest  at  the  base.  The  poorest  are  naturally  the 
most  numerous,  and  the  pyramid  necessarily  has  a  very 
large  base,  much  larger  in  fact  than  pictured  here.  Now 
let  the  height  of  a  body  of  v^ater  surrounding  this  pyramid 
represent  the  obstacle  to  consumption,  i.  e.,  the  price, 
which  forbids  the  purchase  of  the  object  on  the  part  of 
those  who  are  not  rich  enough.  Suppose  the  price  is  so 
high  that  the  level  of  the  water  will  reach  the  summit  of 
the  pyramid ;  there  will  be  but  one  purchaser  whose  for- 
tune will  place  him  above  this  level  and  in  the  zone  of 
consumption;  all  the  others  will  be  submerged  and  will 
not  figure  as  competitors  for  the  possession  of  the  object. 
Suppose  now  that  the  price  which  we  placed  at  the 
level  4,  falls  to  the  level  3,  either  because  the  home  pro- 
duction has  become  less  costly  or  because  the  market  is 
better  supplied  from  abroad  and  in  consequence  the  compe- 
tition of  sellers  has  become  keener.  The  obstacle  repre- 
sented by  the  level  of  the  water  has  lowered,  and  the  lower 
layers  emerge  to  the  point  where  15,000  persons  are  found 


172 


Elements  of  Political  Economy 


in  the  zone  of  consumption.  If  the  price  falls  to  the  level 
of  2  and  I,  i.  e.,  to  the  points  where  first  60,000  and  then 
135,000  persons  emerge  into  the  zone  of  consumption, 
the  market  will  become  progressively  larger. 

Descend  to  zero :  imagine  the  whole  obstacle  of  price 
suppressed,  i.  e.,  product  to  be  free.  To  realize  this  con- 
dition, the  quantity  of  products  would  have  to  be  sufficient 
to  meet  the  unrestricted  demand  of  the  250,000  persons 
at  the  base  of  our  pyramid.  All  of  them  might  now  enter- 
tain pretensions  to  enjoyments  which  no  longer  involve 
trouble  nor  outlay.  There  would  then  be  as  many  pos- 
sible consumers  as  inhabitants. 

It  follows  that  ofifer  enlarges  demand  accordingly  as 
it  lowers  the  price.  Demand  is  practically  greater  accord- 
ingly as  the  product  is  cheaper.  Its  growth  is  out  of  all 
proportion  to  the  fall  in  price;  it  becomes  a  question  of 
progression  rather  than  of  proportion.  This  means  that 
the  extent  of  the  market  is  often  determined  by  the  price 
of  a  utility,  i.  e.,  that  demand  is  determined  by  oifer. 

To  produce  its  effects  it  is  not  necessary  that  compe- 
tition should  always  be  real,  i.  e.,  materially  present;  it 
suffices  if  it  is  virtual  or  possible.  Take  the  case  of  a 
grain  market.  Suppose  it  to  be  supplied  by  fields  in  the 
vicinity.  Suppose  likewise  that  the  farmers  of  the  neigh- 
borhood are  forbidden  to  send  their  wheat  elsewhere,  and 
that  farmers  elsewhere  are  forbidden  to  ship  theirs  to  this 
market.  On  a  market  thus  isolated,  the  price  of  wheat 
would  rise  and  fall  without  any  connection  with  prices 
in  neighboring  towns,  and  these  variations,  susceptible 
of  being  very  sharp  and  sudden,  would  depend  entirely 
upon  the  condition  of  the  harvest  in  the  neighborhood 
and  the  speculations  of  its  farmers. 

Suppress  the  prohibition:  let  wheat  enter  and  leave 


The  Circulation  of  Wealth  173 

freely ;  let  good  roads  be  constructed,  and  a  change  would 
come  over  this  market  without  our  encountering  any  new 
faces.  What  would  take  place  is  this :  the  farmers  would 
still  like  to  sell  their  grain  as  formerly  at  a  high  price, 
but  they  know  that  if  their  price  is  above  that  of  neigh- 
boring towns,  sellers  will  come  from  20  different  markets 
to  profit  by  it.  They  are  accordingly  obliged  to  observe 
the  common  level,  i.  e.,  current  price,  in  order  to  hold  a 
market  which  is  now  open  to  all.  In  this  case  the  compe- 
tition is  simply  virtual  or  possible,  but  its  effects  are  none 
the  less  real. 

In  place  of  a  restricted  locality  we  may  take  as  an  ex- 
ample an  entire  country  and  consider  its  commercial  rela- 
tions with  all  other  countries;  the  phenomena  here  obey 
exactly  the  same  law. 

73.  Fundamental  Conditions  of  Value. — The  law  of 
offer  and  demand  leads  directly  to  the  idea  of  value  which 
is  a  fundamental  idea  in  political  economy.  It  is  so  im- 
portant that  several  authors  have  defined  economic  science 
as  "the  science  of  values." 

I.  We  must  not  confuse  value  and  utility.  Is  any 
value  placed  upon  that  which  is  not  useful?  Evidently 
not.  Utility  is  the  first  and  indispensable  condition  of 
value.  But  is  an  object  valuable  in  exact  proportion  to 
its  utility  ?     It  is  necessary  here  to  resort  to  examples. 

What  is  more  useful  than  air?  If  it  should  fail  us 
even  for  a  few  minutes  we  could  not  continue  to  exist. 
Nevertheless  air  surrounds  us  in  such  abundance  that  we 
experience  no  effort  in  filling  our  lungs  incessantly.  Ac- 
cordingly, as  a  rule,  it  has  no  value.  In  certain  conditions 
it  may  acquire  value,  as  for  example,  in  diving  bells,  and 
in  mines  where  it  is  artificially  supplied,  the  cost  of  which 
supply  appears  in  the  general  expenses  of  operation. 


1/4  Elements  of  Political  Economy 

Again,  water  is  almost  as  necessary  as  air  to  human 
life.  It  is  likewise  abundant,  although,  unlike  air,  it  is 
not  always  directly  at  hand.  It  must  be  brought  into 
our  houses  and  this  service  costs  something.  Accord- 
ingly it  generally  has  a  small  value  which  varies  with  the 
effort  necessary  to  procure  it. 

Consider  the  article  wheat,  which  is  our  principal  veg- 
etable food;  wheat  sells  at  a  lower  price  per  pound  than 
copper,  a  metal  which  is  no  doubt  useful,  but  which  is  not 
indispensable  to  human  existence.  Copper  in  turn  has 
infinitely  less  value  than  the  diamond,  which  is  ordinarily 
employed  only  for  adornment. 

Value  then  is  not  measured  exclusively  by  utility,  if 
by  the  word  utility  we  mean  the  importance  of  things  to 
man's  support.  To  give  to  the  word  utility  the  subjec- 
tive meaning  which  certain  economists  give  it,  i.  e.,  to  de- 
fine it  as  our  estimate  of  things  and  the  price  we  are  will- 
ing to  give  for  them,  is  to  largely  confound  the  expression 
utility  with  that  of  value. 

The  earlier  economists  marked  this  distinction  by  say- 
ing that  things  have  two  kinds  of  value :  value  in  use,  i.  e., 
utility  considered  in  relation  to  personal  use,  and  value 
in  exchange,  or  commercial  value,  i.  e.,  the  power  of  ac- 
quisition, or  capacity  for  being  exchanged  against  a  cer- 
tain quantity  of  other  products.  It  is  in  the  latter  sense 
that  we  use  the  word  value;  the  former  idea  we  express 
by  the  word  utility. 

2.  Does  value  depend  upon  rarity?  There  is  cer- 
tainly a  close  connection.  Air  has  no  value  because  it  is 
so  abundant.  Water  has  so  little  value  because  it,  too, 
is  abundant ;  the  diamond  has  such  a  great  value  because 
it  is  rare.  Why  is  wheat  worth  less  when  there  is  a  good 
harvest,  without  there  being  any  change  in  its  quality  or 


The  Circulation  of  Wealth  175 

nutritive  power?  Solely  because  it  is  more  abundant.^ 
It  is  thus  with  all  merchandise  which  has  a  price.  Rarity 
signifies  deficient  offer. 

In  order  that  rarity  should  exercise  any  influence  on 
value,  however,  there  must  be  demand. 

Suppose  a  gardener  succeeded  in  producing  the  famous 
Blue  Dahlia  which  amateurs  have  so  long  sought  in  vain ; 
it  would  have  considerable  value  because  it  would  be 
unique,  and  horticulturists  would  be  interested  in  it.  If 
he  had  produced  a  Blue  Poppy  which  would  be  quite  as 
rare,  but  about  which  no  one  concerns  himself,  it  would 
be  of  comparatively  little  value.  It  is  not  the  absolute 
rarity  of  the  thing  which  determines  its  value ;  it  must  be 
a  thing  which  is  sought  for.  In  other  words,  we  must 
take  into  account  not  only  the  offer  but  likewise  the  de- 
mand. Nevertheless  it  may  be  said  that  without  rarity 
there  would  be  no  value,  and  that  when  an  article  is  in 
demand  its  value  increases  with  its  rarity. 

3.  Does  value  depend  upon  the  labor  expended? 
We  have  seen  that  the  only  reason  water  has  a  value  is 
because  certain  labor  is  required  to  procure  it.  It  is  be- 
cause a  great  deal  of  labor  is  expended  in  finding  dia- 
monds that  they  have  such  a  great  value.  Value  has 
numerous  points  of  contact  with  labor;  nevertheless  the 
two  do  not  merge.  The  idea  of  labor  is  itself  not  simple 
enough  to  furnish  a  sufficiently  fixed  base  for  the  idea  of 
value.  We  have  already  explained  that  labor  has  its 
value  not  because  of  the  effort  expended,  but  because  of 
the  result  obtained  and  the  utility  created   (see  par.    11 

'  A  failure  of  one-half  in  the  wheat  crop  may  conceivably  cause  a 
fourfold  advance  in  price.  Statistics  based  upon  value  would  in 
such  a  case  show  a  marked  increase  in  social  wealth  while  people 
were  on  the  verge  of  starvation. — Translator. 


iy6  Elements  of  Political  Economy 

and  58).  If  a  miner  in  California  finds  a  big  nugget  of 
gold  at  the  first  stroke  of  his  pick,  is  it  worth  any  less 
than  the  same  weight  of  gold  obtained  by  months  of 
labor? 

If  gold  was  continually  found  in  such  quantity  and 
with  such  ease,  it  would  have  much  less  value. 

Air  has  no  value  because  no  labor  is  needed  to  supply 
it.     We  may  then  safely  say :  no  labor,  no  value. 

Under  the  regime  of  free  competition  each  man  seeks 
to  attract  customers  by  offering  his  product  cheap ;  thence 
arises  a  tendency  to  reduce  prices  to  their  lowest  level. 
What  will  be  this  lowest  level  of  prices  ?  It  must  be  the 
cost  of  reproduction,  which  cost  is  made  up  of  the  labor 
and  capital  it  is  necessary  to  expend.  If  the  value  should 
fall  below  this  level,  the  producer  would  suffer  a  loss  and 
soon  production  would  cease. 

Utility,  rarity  and  labor  are  the  three  fundamental 
conditions  of  value;  but  none  of  them  completely  ex- 
plains value.  This  is  because  value  has  a  nature  of  its 
own.  It  comes  into  being  at  the  very  moment  of  ex- 
change, and  is  the  result  of  the  conditions  of  each  ex- 
change. When  Peter  and  Paul  reached  an  agreement 
for  the  exchange  of  a  dozen  fish  for  one  hare,  it  gave  a 
definite  value  to  each  article;  but  on  the  following  day, 
the  hunter,  more  fortunate  in  the  chase,  may  have  been 
willing  to  surrender  a  hare  for  a  smaller  number  of  fish, 
and  a  change  of  value  would  have  occurred.  Every  ex- 
change presupposes  a  bargain;  each  of  the  contractants 
desires  to  have  more  and  to  give  less.  The  point  of  ac- 
cord between  these  two  conflicting  elements  is  the  value 
of  the  merchandise.  This  point  is  essentially  mobile,  ris- 
ing and  falling  with  time  and  circumstance.     Value  must 


The  Circulation  of  Wealth  177 

then  be  defined  as  a  relation  of  quantity,  established  by 
exchange,  between  two  products  and  services. 

74.  Causes  of  variation  in  value.  Although  essen- 
tially variable,  value  nevertheless  obeys  certain  laws. 
We  have  already  seen  how  it  is  affected  by  the  elements 
of  utility,  rarity  and  labor ;  it  is  even  more  narrowly  cir- 
cumscribed by  the  law  of  offer  and  demand  which  chiefly 
regulates  it. 

I.  Let  us  first  examine,  as  Mill  has  done  so  clearly, 
the  case  of  monopolies.  What  value  had  the  single  biscuit 
which  the  shipwrecked  sailor  consented  to  surrender  to 
his  nine  companions?  Life  being  at  stake,  the  sacrifice 
which  the  purchasers  would  be  willing  to  make  would  be 
without  limit;  the  poorest  could  not  entertain  any  pre- 
tensions to  it,  since  the  rich  would  offer  more,  and  one  of 
them,  the  richest  of  all,  must  necessarily  obtain  it,  paying 
for  it  a  little  more  than  he  who  was  second  in  point  of 
wealth. 

This  is  what  actually  takes  place  at  auctions.  A  pic- 
ture of  Reubens  is  on  sale;  it  is  a  unique  work  of  its 
kind ;  who  will  have  it  ?  All  the  world  wants  it,  but  those 
who  are  not  rich  know  that  they  cannot  aspire  to  it,  and 
they  do  not  even  enter  the  competition.  Ten  persons  be- 
gin by  a  bid  of  20,000  dollars  for  it.  The  price  is  carried 
to  30,000  dollars.  Eight  persons  are  still  in  the  competi- 
tion at  40,000  dollars,  and  five  are  still  in  at  60,000  dollars. 
Presently  there  are  only  two  bidders,  but  one  of  them  is  at 
the  limit  of  the  sacrifice  he  is  willing  to  make;  an  addi- 
tional bid  of  1,000  dollars  suffices  to  give  the  picture  to 
the  last  bidder  who  remains  alone  in  the  field,  or,  to  employ 
a  figure  already  used,  alone  in  the  zone  of  consumption 
above  the  rising  sea  of  prices. 


178  Ele?nents  of  Political  Economy 

The  value  of  a  unique  object  is  fixed  at  a  point  where 
all  bidders  except  one  have  been  eliminated. 

In  the  case  of  the  shipwrecked  sailors  where  the  food 
was  necessary  to  sustain  life,  the  sacrifice  was  without 
limit ;  in  the  case  of  the  picture  there  is  a  limit.  It  is 
found  in  the  number  of  contestants,  which  is  less  accord- 
ing as  the  object  is  less  useful  to  existence  or  less  sought 
for ;  this  is  shown  by  the  facts  of  daily  life. 

If  the  harvest  of  nuts  is  short,  many  people  do  with- 
out them  that  year,  and  the  value  of  those  which  are  sold 
is  not  greatly  increased.  But  let  the  wheat  crop  be  short 
and  matters  are  different.  Suppose  a  given  population 
requires  100,000  bushels  and  the  harvest  yields  only  75,- 
000  bushels.  If  none  can  be  imported  from  abroad  one- 
quarter  of  the  inhabitants  will  starve,  or  a  large  number 
of  them  must  live  during  the  year  on  half  rations.  One 
does  not  easily  resign  himself  to  either  of  these  alterna- 
tives. A  competition  takes  place  for  the  precious  and  rare 
article  whose  value  rises  not  in  proportion  to  the  quantity 
lacking  but  in  much  greater  ratio  owing  to  the  fears  and 
haste  of  the  buyers. 

2.  The  second  case  is  that  of  unlimited  competition. 
Under  this  regime  the  product  may  be  multiplied  almost 
indefinitely  without  the  last  of  100,000  units  costing  any 
more  than  the  first.  Cotton  fabrics  and  common  pottery, 
the  material  for  which  is  so  abundant,  are  in  this  cate- 
gory. When  an  article  can  be  multiplied  without  increas- 
ing the  cost  of  production  (that  which  is  true  of  many 
manufactured  products),  offer,  i.  e.,  production,  seeks  to 
estimate  demand  and  solicits  it.  In  this  case  demand  it- 
self largely  depends  on  value,  value  being  fixed  by  the 
average  cost  of  production. 

3.  There  is  a  third  case,  that  in  which  production  can 


The  Circulation  of  Wealth  179 

be  increased  only  by  an  increase  in  cost;  this  applies  to 
most  natural  products.  If  demand  increases,  it  may  be 
possible  to  make  a  plot  of  land  yield  i^^  times  as  much, 
but  in  the  absence  of  any  change  in  scientific  processes,  it 
will  be  necessary  to  employ  in  labor  and  fertilizer  twice 
as  much  capital.  Naturally  not  all  the  fields  will  require 
so  much  as  this,  but  will  the  products  of  different  fields 
differ  in  value  because  of  the  difference  in  productiveness? 
Surely  not.  Once  on  the  market  it  is  the  quality  of  the 
product  alone  that  is  considered ;  one  does  not  concern 
himself  about  the  manner  of  its  production.  If  there  is 
need  for  100  million  bushels  of  wheat,  the  last  million 
is  demanded  and  taken  as  well  as  the  first,  in  the  course 
of  the  year.  This  last  million  bushels  must  at  least  yield 
its  cost  of  production,  say  for  example  a  dollar  per  bushel. 
if  regidar  production  is  to  continue.  Now  the  other  pro- 
ducers who  have  raised  their  wheat  at  less  expense  are 
careful  not  to  sell  it  any  cheaper,  and  a  dollar  per  bushel 
becomes  the  normal  market  price.  It  is  the  cost  of  pro- 
duction of  the  last  million  bushels  demanded  that  fixes 
the  market  price.  When  an  article  greatly  in  demand 
can  be  produced  in  increasing  quantity  only  at  greater  ex- 
pense, it  is  the  highest  cost  of  production  that  fixes  its 
market  value;  thence  arises  the  phenomenon  of  rent  al- 
ready explained  (see  par.  49). 

We  have  seen  then  that  two  conditions  are  requisite 
to  produce  value,  the  desirability  of  the  object  (utility) 
and  the  impossibility  of  procuring  that  object  without 
effort  (rarity  and  labor).  It  is  for  each  to  decide  whether 
he  prefers  to  satisfy  his  desire  or  to  abstain  from  effort,  to 
spare  himself  the  inconvenience  of  privation,  or  the  incon- 
venience of  labor. 

75.     Distinction  between  Value  and  Wealth. — There 


i8o  Elements  of  Political  Economy 

is  a  serious  inconvenience  in  making  value  the  pivot  of 
political  economy.  It  may  lead  us  to  the  conclusion  that 
the  wealth  of  a  country  is  made  up  of  the  sum  of  values 
the  country  possesses,  and  to  extol  value.  This  is  only 
a  half-truth  against  which  we  must  guard.  Objective 
utility  is  a  positive  quality  eminently  desirable;  we  can 
never  have  too  many  useful  things.  Rarity,  on  the  other 
hand,  is  a  negative  quality  and  is  an  evil  which  the  efforts 
of  labor  tend  to  combat.  Value  has  some  of  the  defects 
of  rarity,  with  which  it  is  connected.  A  shortage  of  the 
wheat  crop  by  one-quarter  of  its  normal  yield  may  cause 
the  total  value  of  the  crop  to  rise  50%  above  its  normal 
total  value.  Is  this  a  gain,  and  is  the  world  any  richer 
for  it?  Evidently  not.  When,  as  the  result  of  an  in- 
vention, a  manufactured  product  can  be  obtained  with  less 
labor  and  less  waste  of  material,  competition,  which  tends 
to  cause  everything  to  approach  the  cost  of  production, 
soon  reduces  the  value  of  the  product.  Is  not  this  a  good  ? 
When  commerce  supplies  the  market  with  certain  prod- 
ucts in  such  quantity  that  the  price  falls,  must  this  addi- 
tional supply  be  regarded  as  an  affliction  ? 

The  progress  of  science  applied  to  manufactures  or 
transportation  tends  to  incessantly  reduce  the  cost  of  pro- 
duction, and  consequently,  the  value  of  merchandise. 
The  reason  the  reduction  is  not  more  apparent  is  because 
it  is  so  general.  If  it  operated  on  one  kind  of  merchan- 
dise two  units  of  that  would  soon  be  worth  but  one  unit 
of  other  kinds.  But  if  it  operates  on  the  other  kinds  at 
the  same  time,  and  to  the  same  degree,  one  unit  of  the 
merchandise  under  consideration  will  continue  to  exchange 
against  one  unit  of  another  merchandise.  The  value,  i.  e., 
the  relation  resulting  from  exchange  is  not  modified,  but 
the  inhabitants  of  the  country,  being  able  to  procure  more 


The  Circulation  of  Wealth 


i8i 


enjoyments  by  an  equal  expenditure  of  labor  are  richer. 

Carey  has  ingeniously  portrayed  industrial  progress 
by  the  adjoining  figure. 

The  line  AB  represents  nature,  i.  e.,  natural  forces 
and  matter;  the  line 
AC  represents  the 
product  fashioned  by 
human  industry, 
ready  for  consump- 
tion, and  brought  to 
market  through  the 
channels  of  com- 
merce. The  diverg- 
ence of  these  two 
lines  measures  the 
effort    necessary    to      -^  -^  C 

put  nature  at  the  service  of  consumption.  In  barbarous 
times,  which  may  be  represented  by  the  line  D,  the  space 
between  them  was  very  great.  This  means  that  much 
effort  and  labor  were  then  required  to  transform  nature 
into  products  suitable  for  man's  consumption.  When 
such  effort  is  necessary  for  the  whole  of  production  it 
implies  that  economic  civilization  is  but  little  advanced. 
When  it  applies  only  to  a  particular  product,  that  product, 
in  the  manufacture  of  which  much  effort  has  been  ex- 
pended, has  a  greater  market  value  than  products  which 
require  less  effort,  although  the  latter  may  represent  more 
utility. 

As  man  rises  in  the  scale  of  civilization  and  industrial 
processes  are  perfected,  it  requires  less  effort  to  arrive 
at  a  given  result  whether  for  the  whole  of  production  or 
for  a  particular  product;  the  distance  between  the  sides 
of  the  angle  then  diminishes  (line  E) .     A  further  advance 


1 82  Elements  of  Political  Economy 

in  civilization  shortens  this  Hne  still  more  as  at  F.  If 
civilization  should  reach  the  point  A,  the  apex  of  the 
angle,  it  would  mean  that  effort  had  been  reduced  to  zero, 
i.  e.,  nature  would  lend  itself  to  the  satisfaction  of  our 
needs  without  effort  on  our  part. 

Such  a  condition  can  never  be  realized.  Progress, 
however,  consists  in  approaching  it,  as  we  have  shown  in 
treating  of  the  roles  of  intelligence  and  capital  (see  par. 
19).  Such  progress  tends  to  diminish  the  value  of  each 
particular  object.  It  would  not  prevent  the  total  of  val- 
ues contained  in  a  general  inventory  of  the  national  wealth 
from  increasing  by  a  multiplication  of  objects  at  the 
same  time  that  the  price  of  each  product  diminished. 

Where  a  fall  in  prices  is  due  to  improved  processes,  it 
generally  indicates  a  progressive  condition  of  the  nation, 
and  is  accompanied  by  an  increase  of  national  well-being. 

76.  Price. — Price  is  simply  the  value  of  an  article 
expressed  in  money. 

Since  value  is  the  relation  established  by  exchange 
between  two  or  more  articles,  we  may  express  it  as  we 
like.  We  may  say,  for  example,  the  hare  is  worth  a 
dozen  fish;  the  hare  is  worth  a  peck  of  wheat.  But  such 
a  diversity  in  the  measure  of  value  would  cause  hopeless 
confusion.  In  order  to  understand  each  other,  it  was 
necessary  that  men  residing  in  the  same  country  should 
employ  the  same  term  of  comparison,  as  for  example,  an 
ox  or  a  measure  of  wheat.  The  superiority  which  the 
precious  metals  enjoy  for  serving  as  a  common  term  of 
comparison  was  recognized  at  an  early  date  in  most 
countries  and  money  was  created. 

Men  shaped  disks  of  metal  to  which  they  gave  certain 
names.  These  constituted  money,  which  is  a  product, 
obeying,  like  other  products,  the  general  laws  of  exchange. 


The  Circulation  of  Wealth  183 

It  can  be  secured  only  by  surrendering  another  product 
which  is  its  equivalent.  The  hare  is  for  sale  in  the  mar- 
ket; how  much?  25  cents.  This  is  expressed  by  say- 
ing the  hare  is  worth  25  cents,  or  25  cents  is  the  price  of 
the  hare.  It  would  be  equally  correct  to  say  that  the  sum 
of  25  cents  is  worth  a  hare,  as  they  exchange  for  each 
other.  How  much  are  the  fish?  25  cents  a  dozen. 
How  much  is  the  wheat?  $1.00  per  bushel.  We  now 
have  a  term  of  comparison  called  a  common  denominator 
of  value;  this  is  money,  which  effectually  serves  to  ex- 
press the  value  of  things. 

Resume 

Production  and  consumption  constitute  the  source  and 
the  end  of  economic  evolution  ;  exchange  is  the  intermedi- 
ate phase. 

Exchange  is  of  different  kinds :  product  against  prod- 
uct ;  labor  against  product ;  possession  of  a  product 
against  the  temporary  enjoyment  of  another  product ;  and 
products  against  services.  In  all  of  these  what  really 
happens  is  that  services  are  exchanged  against  services. 

Wealth  may  be  distributed  by  virtue  of  authority. 

In  exchange  it  is  distributed  under  a  regime  of  free- 
dom of  contract  conformably  to  the  law  of  offer  and  de- 
mand. 

Offer  determines  demand.  In  the  case  of  monopo- 
lies offer  restricts  demand  by  raising  prices.  In  case  of 
competition,  actual  or  virtual,  offer  enlarges  demand  by 
lowering  prices.  The  increase  in  demand  brought  about 
by  a  fall  in  prices  is  proportionally  much  greater  than  the 
fall  in  prices. 

Utility,  rarity  and  labor  are  the  three  fundamental 
conditions  of  value.     Value  is  a  relation  of  quantitv  es- 


184  Elements  of  Political  Economy 

tablished  between  two  products  or  services  by  exchange. 
It  is  regulated  principally  by  the  law  of  offer  and  demand. 

The  value  of  a  unique  object  is  fixed  at  a  point  where 
all  competitors  except  one  have  been  eliminated  by  suc- 
cessive bids. 

The  value  of  an  article  which  has  become  rare  rises, 
not  in  proportion  to  the  shortage,  but  to  a  much  greater 
degree:  this  is  what  happens  in  the  case  of  monopolies. 
When  the  article  may  be  multiplied  without  any  increase 
in  the  cost  of  production  its  value  is  regulated  by  the 
average  cost  of  production :  this  occurs  under  unlimited 
competition. 

When  production  can  be  increased  only  by  increasing 
cost,  value  is  regulated  by  the  highest  cost  of  production. 
This  is  what  gives  rise  to  rent.  Rarity  is  an  evil ;  we 
can  never  have  too  many  useful  things. 

If  products  of  all  kinds  increase  at  the  same  time  and 
in  like  quantity,  and  at  no  extra  expenditure  of  effort, 
their  value  will  not  be  changed;  nevertheless  the  people 
of  the  country  will  be  richer.  Price  is  the  value  of  mer- 
chandise expressed  in  money. 

II 

MONEY 

77.  The  Nature  and  Role  of  Money.  78.  The  Advantages  of 
Precious  Metals  as  Money.  79.  The  So-called  "Double  Standard." 
80.  Subsidiary  Money.  81.  Monetary  Systems.  82.  The  Value  of 
the  Precious  Metals. 

yy.  The  Nature  and  Role  of  Money. — Money  is, 
above  everything  else,  the  instrument  of  exchange;  it  is 
through  its  instrumentality  that  exchange  is  most  fre- 
quently effected. 

What   is  money?     It   is   a  commodity.     Like  other 


The  Circulation  of  Wealth  185 

commodities  it  is  subject  to  the  common  law  of  exchange 
and  is  sold  and  bought  for  what  it  is  worth.  But  it  is  a 
commodity  clothed  with  a  legal  quality.  By  virtue  of 
this  quality,  it  serves  as  the  general  instrument  of  ex- 
change, as  a  measure  and  medium  in  the  sale  and  pur- 
chase of  other  commodities,  and  as  a  common  denomi- 
nator in  comparing  values. 

Under  this  definition,  representative  money  is  not  in- 
cluded.    The  terms  of  the  definition  need  explanation. 

First :  Money  is  a  commodity.  It  cannot  be  a  simple 
sign,  a  thing  of  pure  convention.  It  must  be  a  real  thing, 
a  product  obtained  by  human  effort,  combining  the  triple 
quality  of  utility,  rarity  and  labor — without  which  quali- 
ties value  does  not  exist — and  in  the  determination  of  its 
value,  subject,  like  all  other  commodities,  to  the  law  of 
supply  and  demand. 

Accordingly  money  is  an  equivalent,  i.  e.,  it  is  worth 
in  itself  as  much  as  the  object  against  which  it  is  ex- 
changed. Otherwise  stated,  money  is  sold  and  bought 
for  what  it  is  worth. 

2.  Money  as  a  General  Instrnuient  of  Exchange, 
Measure  and  Medium.  In  a  civilized  society  money  is 
everywhere  present  (actually  or  nominally)  in  all  ex- 
changes, but  it  is  neither  the  first  nor  the  final  term  of 
exchanges  :  it  is  the  middle  term.  It  is  not  with  the  final 
object  of  having  the  money  that  one  buys  money — for  it 
is  thus  that  one  may  define  the  act  of  exchanging  merchan- 
dise against  money,  i.  e.,  a  sale — but  one  does  it  with  the 
object  of  having  in  his  possession  the  instrument  zvith 
zvhich  lie  can  procure  any  other  commodity. 

A  trunk-maker  sells  a  trunk.  That  evening  he  pays 
for  his  dinner,  the  following  day  he  buys  a  hat  and  a  fresh 
supply  of  lumber.     What   role  has  the  money  played? 


1 86  Elements  of  Political  Economy 

The  trunk-maker  who  works  for  a  Hving,  or  in  other 
words,  produces  in  order  to  consume,  has  received  money 
in  exchange  for  his  trunk,  which  is  the  result  of  his  labor, 
and  has  paid  it  out  in  exchange  for  his  dinner,  his  hat 
(personal  needs)  and  for  a  fresh  supply  of  lumber  (trade 
needs)  :  services  for  services.  These  exchanges  could 
not  have  been  made  except  through  the  instrumentality 
of  money ;  because  the  lumber  merchants  had  no  use  for 
a  trunk  and  the  traveller  who  bought  the  trunk  was  neither 
a  restaurateur,  a  hatter  nor  a  lumber  merchant. 

3.  Money  is  the  common  denominator  of  values. 
Things  equal  to  the  same  thing  are  equal  to  each  other. 
If  a  hat  is  worth  20  francs  and  if  four  chickens  are  worth 
20  francs,  a  hat  is  worth  four  chickens  or  a  chicken  is 
worth  a  quarter  of  a  hat. 

How  do  we  establish  a  relation  of  value  between  a 
voyage  in  a  steamboat  from  London  to  New  York  and  an 
overcoat?  Here  are  two  things  between  which  there  is 
at  first  blush  no  relation  whatever.  But  money  steps  in 
as  a  term  of  comparison  or  as  a  measure.  The  moment 
we  say  that  the  passage  costs  100  dollars  and  the  overcoat 
20  dollars,  there  is  no  difficulty  in  arriving  at  the  conclu- 
sion that  it  costs  five  times  as  much  to  travel  from  London 
to  New  York  as  to  buy  an  overcoat.  Money  is  to  the  ex- 
change of  products  what  language  is  to  the  exchange  of 
thought. 

4.  Money  has  a  legal  quality.  It  is  to  this  quality 
that  it  owes  the  fact  that  it  is  really  a  common  denomi- 
nator. It  is  true  that  it  is  out  of  gold  and  silver  that  we 
make  money.  But  bullion  is  not  on  that  account  money; 
it  is  only  a  commodity.  In  order  to  facilitate  exchange, 
each  state  gives  a  legal  tender  quality  to  moneys  struck 
conformably  to  the  rules  it  has  established;  these  rules 


The  Circulation  of  Wealth  187 

fix  the  pattern,  weight  and  denomination  of  the  piece  but 
do  not  fix  its  value.  The  state  may  decide  that  a  dollar 
piece  shall  contain  25.8  grains  of  gold  nine-tenths  fine 
and  that  everyone  to  whom  a  dollar  is  owing  shall  accept 
it  in  discharge  of  the  debt  if  the  debtor  offers  it;  but  it 
cannot  decree  that  anyone  shall  be  forced  to  give  in  ex- 
change for  the  dollar  piece  a  determinate  quantity  of  wheat 
or  cloth. 

If  the  unrestricted  legal  tender  of  a  given  country  is 
to  be  honest,  the  metal  contained  in  the  piece  must  have 
the  same  intrinsic  value  as  an  ingot  of  the  same  metal  and 
weight,  less  perhaps,  the  cost  of  coinage.  Were  it  other- 
wise, the  piece  would  be  simply  conventional  or  repre- 
sentative money,  a  sign  and  not  an  equivalent.  When 
subsidiary  coins  are  struck  as  simple  representative  money, 
it  involves  no  inconvenience  and  may  be  of  decided  ad- 
vantage provided  the  legal  tender  quality  is  limited  by 
law  to  a  small  sum.  But  when  the  chief  money  of  a  coun- 
try is  debased — as  has  frequently  happened  in  the  past — 
it  always  involves  grave  inconvenience  for  commerce :  the 
measure  of  value  is  falsified. 

78.  The  Advantages  of  the  Precious  Metals  as 
Money. — Why  have  the  precious  metals  been  chosen  as 
the  materials  for  money?  Because  they  possess  to  the 
highest  degree  the  qualities  requisite  for  that  use. 

First :  It  is  well  that  money  should  be  a  thing  which 
is  rare  and  costly,  embodying  great  value  in  small  volume 
so  that  it  can  be  carried  and  transported  without  too  much 
expense.  The  Spartans  had  iron  money ;  but  the  Spar- 
tans were  poor  and  had  but  little  commerce.  Imagine  a 
man  who  wanted  to  make  a  hundred  dollars'  worth  of  pur- 
chases in  the  course  of  his  journey  and  who  had  to  carry 


1 88  Elements  of  Political  Economy 

with  him  from  eight  to  ten  thousand  pounds  of  iron  with 
which  to  do  it ! 

Silver  and  gold,  extracted  from  the  mines  by  laborious 
processes,  prized  for  purposes  of  adornment  and  sought 
for  because  of  their  beauty  and  brilliancy,  have  a  value 
superior  to  that  of  all  other  metals  with  one  or  two  unim- 
portant exceptions. 

Second :  It  is  necessary  that  money  should  be  made 
of  a  substance  perfectly  homogeneous  and  unalterable. 
If  the  quality  of  the  monetary  metal  varied,  or  if  it  deteri- 
orated with  time,  a  given  quantity  of  the  metal  could  not 
be  a  common  denominator.  This  is  what  would  happen 
if  a  pound  of  beef  were  taken  as  the  monetary  unit.  Cer- 
tain cuts  are  worth  more  than  others  and  what  would  a 
pound  of  meat  be  worth  eight  days  after  one  had  bought 
it?  The  deterioration  is  such  that  the  value  is  reduced 
to  nil.  The  same  inconvenience  would  obtain  if  we  took 
as  unit  a  quart  of  wine  because  there  are  wines  of  all 
qualities  and  all  prices.  On  the  contrary,  in  the  case  of 
gold  and  silver  this  uniformity  is  complete.  Between  an 
ounce  of  gold  taken  from  the  Mexican  mines  two  cent- 
uries ago  and  an  ounce  of  gold  extracted  last  year  in  the 
Transvaal,  there  is  no  difference  either  in  weight,  molecu- 
lar condition,  appearance  or  value. 

3.  It  is  important  that  commodity-money  should  be 
divisible  without  loss  of  value.  This  quality  is  found  in 
some  of  the  primitive  moneys,  such  as  tobacco  which 
served  the  purposes  of  exchange  in  Virginia  until  the 
middle  of  the  i8th  century.  It  is  not  found  in  furs  which 
formerly  served  as  money  in  America  as  well  as  Russia. 
Neither  is  it  found  in  the  precious  stones  which  possess 
the  quality  of  great  value  in  small  volume.  Cut  up  the 
precious  metals  in  as  many  pieces  as  you  like  and  the  value 


The  Circulation  of  Wealth  189 

of  the  pieces  taken  together  will  equal  the  value  of  the 
original  ingot.  Fuse  them  and  you  will  recover  the  ingot 
in  its  original  value. 

4.  It  is  important  that  the  value  of  the  material  from 
which  commodity-money  is  struck  should  be  as  stable  as 
possible.  To  have  that  value  absolutely  unchangeable  is 
impossible;  it  is  a  contradiction  of  the  very  sense  of  the 
word  "value,"  which  implies  a  variable  relation.  On  the 
other  hand,  if  it  be  too  variable  this  fact  nullifies  one  of 
the  essential  functions  of  money,  that  of  a  common  de- 
nominator of  value.  A  measure  which  incessantly  varies 
does  not  ofifer  a  medium  for  consistent  comparison.  This 
is  what  would  happen  if  we  were  to  select  as  money  such 
an  article  as  wheat,  a  commodity  for  which  there  is  a 
general  demand.  The  harvests  vary  greatly  from  year 
to  year.  As  the  bulk  of  the  wheat  produced  is  consumed 
from  one  season  to  another,  the  supply  being  never  equal 
to  two  harvests,  bad  harvests  might  immediately  cause  a 
shortage  say  of  5%  or  10%,  and  a  good  harvest  the  re- 
verse. Sharp  variations  in  price  follow  variations  in  the 
supply  of  wheat;  the  price  may  be  even  doubled  in  a 
period  of  six  months. 

In  the  case  of  the  precious  metals,  this  inconvenience 
is  greatly  reduced.  They  of  course  vary  in  value  and  if 
we  embrace  a  long  lapse  of  time,  a  very  considerable  varia- 
tion may  be  perceived.  But  the  phenomenon  is  not  pro- 
duced suddenly  and  for  this  reason :  if  one  has  been  so 
fortunate  as  to  discover  new  mines  or  exploit  old  ones 
to  more  advantage,  the  increased  production  of  the  year 
never  constitutes  more  than  a  small  portion  of  the  world's 
supply,  composed  as  it  is  of  the  production  of  so  many 
previous  years.  Usage  does  not  destroy  the  precious 
metals;  they  are  employed,  they  are  transformed,  but  the 


I  go  Elements  of  Politieal  Economy 

material  remains,  diminished  only  to  the  extent  of  the 
impalpable  powder  which  polishing  produces  and  by  losses 
arising  from  hoarding  and  shipwrecks.  There  are  no 
other  commodities  which  possess  this  quality  to  the  same 
degree  as  the  precious  metals  because  few  of  them  are  so 
little  liable  to  alteration.  A  peculiar  combination  of  cir- 
cumstances was  required  to  produce  the  fall  in  the  value 
of  silver  which  has  taken  place  since  1870. 

The  precious  metals  are  then  the  very  thing  of  which 
commerce  is  in  search;  a  precious  commodity  (great 
value),  always  the  same  (homogeneity  and  divisibility), 
easily  preserved  (unalterability) ,  easily  stored  (great 
value  in  small  volume),  adapted  to  serve  as  a  common 
measure  (relative  stability  of  value). 

Accordingly  the  precious  metals  are  the  material  of 
which  we  make  money,  but  they  are  not  strictly  money 
itself.  And  why?  We  have  before  us  an  ingot  of  gold 
but  we  do  not  know  its  weight  nor  its  fineness.  To  ascer- 
tain the  weight  is  not  a  difficult  process  but  to  establish  the 
degree  of  fineness  involves  a  painstaking  chemical  analysis 
calling  for  special  knowledge.  These  are  so  many  ob- 
stacles to  exchange.  In  China  they  use  ingots  bearing 
impressions  of  the  weight,  denomination  and  often  the 
marks  of  the  principal  merchants  through  whose  hands 
they  have  passed.  This  is  troublesome  and  besides  there 
is  too  much  opportunity  under  this  system  to  chip  the 
ingots.  In  the  ancient  world  men  had  already  devised  a 
better  system  than  this,  a  system  which  is  to-day  prac- 
ticed by  all  civilized  people,  the  Chinese  excepted.  It  con- 
sists in  striking  with  the  imprint  of  the  state  and  under 
the  state's  guarantee,  certain  disks  of  gold  and  silver  of 
which  the  pattern,  weight  and  denomination  are  definitely 
determined  by  law,  of  which  the  distinguishing  features 


The  Circulation  of  Wealth  191 

can  be  easily  recognized,  and  which  one  must  accept  as 
money  in  all  payments  because  they  are  legal  tender. 

79.  The  So-called  "Double  Standard." — Two  things 
are  to  be  considered  in  coining  money :  first,  the  question 
of  the  metal  or  metals  adopted  by  law  as  the  fundamental 
measure  or  regulator  of  value ;  second,  the  question  of  the 
weight  and  denomination  of  the  coin.  The  first  consid- 
eration introduces  the  question  of  the  monetary  standard. 
We  understand  by  the  word  standard  the  unit  of  measure 
of  values  fixed  by  the  law  of  a  given  country.  When 
the  law  has  established  the  yard  or  quart  it  has  attributed 
to  them  a  certain  length  or  a  certain  capacity  which  are 
identical  in  all  times,  in  all  places,  no  matter  how  long  or 
voluminous  the  object  to  be  measured:  being  indepen- 
dent of  that  object,  they  measure  it  without  being  meas- 
ured by  it. 

When  the  law  establishes  a  monetary  unit  it  does  not 
fix  its  value  since  the  value  of  money  is  measured  in  each 
act  of  exchange  by  the  object  which  it  purchases  whilst 
it  itself  measures  the  value  of  that  object.  The  law  in 
reality  fixes  but  one  thing:  the  nature  of  the  piece  of 
money  serving  as  a  unit,  i.  e.,  its  pattern,  weight  and  de- 
nomination. Shall  the  piece  be  gold ?  Shall  it  be  silver? 
Shall  it  be  indifferently  gold  or  silver?  Here  is  an  im- 
portant question,  for  the  precious  metals  are  two  in  num- 
ber ;  and  since  all  value  is  variable  the  ratio  between  them 
is  not  unchangeable.  Let  the  ounce  of  gold  exchange 
for  the  moment  against  fifteen  and  a  half  ounces  of  silver. 
That  does  not  imply  that  fifteen  and  a  half  ounces  of  sil- 
ver will  always  be  worth  an  ounce  of  gold  (in  1898  it  re- 
quired more  than  thirty  ounces  of  silver  to  buy  an  ounce 
of  gold).  Let  us  suppose  a  borrower  receives  95.000  dol- 
lars, which  he  engages  to  pay  back  in  twent}-  years  and  he 


192  Elements  of  Political  Economy 

receives  that  sum  in  gold.  What  ought  he  to  pay  back, 
5,000  ounces  of  gold  or  77,500  ounces  of  silver? 

We  may  solve  this  question  in  three  different  ways. 

First :  By  the  adoption  of  the  gold  standard — Eng- 
lish system. 

Second :  By  the  adoption  of  the  silver  standard — 
Mexican  system. 

Third:  By  the  adoption  of  the  so-called  "Double 
Standard,"  with  or  without  restrictions — French  system. 

The  system  of  the  so-called  Double  Standard  or  Bi- 
metallism if  generally  practiced  would  have  the  advan- 
tage of  enlarging  the  monetary  supply  because  it  admits 
of  the  use  of  both  metals  indifferently  and  consequently 
of  rendering  the  oscillations  in  the  real  value  of  the  money 
metals  less  violent.  Let  the  existing  quantity  of  gold  be 
represented  by  100  and  suppose  that  gold  is  the  standard. 
If,  by  reason  of  discovery,  you  add  in  a  certain  number  of 
years  ten  to  that  quantity,  the  increase  would  be  one- 
tenth.  Now  represent  by  100  the  quantity  of  silver  and 
establish  the  so-called  Double  Standard.  The  sum  of  the 
money  metals  would  be  equal  to  200.  Consequently  an 
addition  of  ten  in  gold  would  augment  the  stock  by  only 
one-twentieth  and  the  depreciation  would  be  less. 

The  advocates  of  bi-metallism  believe  that  if  the  im- 
portant countries  should  reach  an  understanding  in  the 
matter  of  a  ratio  between  gold  and  silver  somewhere  near 
the  existing  market  ratio  (say  30  to  i),  that  understand- 
ing would  suffice  to  fix  approximately  the  relative  value 
of  the  two  metals  and  would  thus  provide,  without  any 
inconvenience,  a  larger  monetary  basis.^ 

^  The  theory  of  compensation  or  substitution  on  which  Interna- 
tional Bimetallism  is  founded  presumes  that  if  one  can  pay  his  debts 
in  either  gold  or  silver,  any  fluctuation  in  the  ratio  of  the  metals  is 


The  Circulation  of  Wealth  193 

Such  a  measure,  even  if  the  equihbrium  were  not  main- 
tained, would  tend  to  sustain  somewhat  the  metal  over- 
valued by  the  ratio  because  their  employment  as  money  be- 
ing the  principal  use  of  the  precious  metals,  both  would 
have  an  assured  use  at  a  fixed  price.  But  it  is  never  wise 
to  try  to  substitute  an  artificial  and  conventional  equilib- 
rium for  a  natural  equilibrium  of  value;  nor  is  it  possible 
to  maintain  it  long. 

Monometallism  or  the  system  of  a  single  standard, 
either  gold  or  silver,  is  preferable  because  more  practi- 
cable, more  logical,  more  conformable  to  the  purpose  of 
money,  which  is  to  be  a  fixed  measure,  if  not  as  to  value 
— that  which  is  impossible — at  least  as  to  the  substance. 
A  man  borrows  5,000  ounces  of  gold  expressed  by  95,000 
dollars.  Under  this  system  he  will  pay  back  5,000  ounces 
of  gold.  It  is  important  that  the  contract  should  be  clear  : 
this  one  is  perfectly  so.  These  5,000  ounces  of  gold,  are 
they  worth  more  or  less?  That  is  of  minor  importance. 
What  the  borrower  has  received  he  is  paying  back. 

Amongst  the  metals  upon  which  the  state  can  confer 
the  legal  tender  quality  gold  is  in  general  preferable.  It 
is,  as  has  been  truly  said,  the  money  of  rich  nations,  and 
it  is  to-day  sufficiently  abundant  to  fulfill  that  office.  It 
possesses  to  a  greater  degree  than  silver  two  conditions 
requisite  for  money :  It  has  more  value  for  a  given  vol- 
ume, consequently  is  more  easily  carried;  it  is  less  liable 
to  alteration  and  consequently  less  subject  to  wear.  Fi- 
nally, the  adoption  of  the  Gold  Standard  does  not  preclude 

immediately  corrected  by  everyone  seeking  the  lower  metal  in  which 
to  pay  his  debts.  No  one  will  pay  his  debts  in  the  higher  of  two 
legal  tenders.  Under  such  an  agreement,  therefore,  if  silver  should 
fall  below  the  legal  ratio  the  demand  for  silver  would  cause  it  to 
rise,  and  the  neglect  of  gold  would  cause  it  to  fall,  thus  at  once 
restoring  the  parity. — Translator. 
13 


194  Elements  of  Political  Economy 

the  use  of  silver  as  subsidiary  money  whilst  the  adoption 
of  the  Silver  Standard  renders  inconvenient  the  use  of 
gold,  which  then  becomes  a  simple  commodity. 

80.  Subsidiary  Money. — The  single  standard  does 
not  necessarily  preclude  the  use  of  other  metals  for  money. 
The  metal  adopted  for  the  standard  serves  for  the  manu- 
facture of  the  chief  money  with  which  every  debtor  has 
the  right  to  discharge  his  debts  and  which  no  creditor 
may  refuse.  But  by  the  side  of  the  chief  money  we  must 
have  subsidiary  money,  having  a  limited  legal  tender.  It 
is  not  possible  to  strike  gold  pieces  of  very  small  value 
and  we  must  accordingly  use  for  this  purpose  silver,  cop- 
per or  nickel.  In  this  case  the  state  fixes  by  law  the  maxi- 
mum amount  beyond  which  no  one  will  be  compelled  to 
receive  this  money  in  discharge  of  a  debt.  These  pieces 
are  called  "subsidiary"  coins. 

We  can  give  them  a  nominal  value  superior  to  their 
intrinsic  value  without  violating  the  fundamental  rule  of 
money  because  these  coins  are  only  change.  This  is  the 
practice  which  has  always  prevailed  with  respect  to  the 
base  coins,  nickel  or  copper.  Owing  to  the  decided  fall 
in  the  value  of  silver  since  1870  and  the  fact  that  silver 
coins  have  not  been  correspondingly  increased  in  weight, 
the  silver  coins  of  all  countries  except  those  which  have 
a  Silver  Standard,  are  likewise  only  subsidiary  coins,  i.  e., 
nominally  worth  much  more  than  they  are  worth  intrinsic- 
ally. The  moment  the  coins  cease  to  be  an  equivalent 
and  become  simply  representative  money,  it  is  of  course 
necessary  to  limit  the  quantity  which  a  creditor  may  be 
forced  to  accept. 

81.  Monetary  Systems. — An  examination  of  the 
weights  and  denominations  of  coins  leads  to  a  study  of  the 
monetary  systems  of  different  nations.     Up  to  1873  the 


The  Circulation  of  Wealth  195 

United  States  practiced  free  coinage  of  gold  and  silver  at  a 
fixed  ratio.  It  began  with  "a  ratio  of  15  to  i  which  under- 
valued gold  and  rapidly  put  the  country  on  a  silver  basis. 
In  1834  it  virtually  went  over  to  a  gold  basis  for  the  rea- 
son that  the  ratio  was  changed  to  16  to  i  and  silver  was 
under-valued.  The  value  of  silver  was  approximately 
fixed  by  the  practice  of  the  Latin  countries  in  Europe  and 
no  one  in  America  would  take  what  at  one  period  (in 
1859)  amounted  to  $1.05  worth  of  silver  to  the  mint  to 
have  it  coined  and  receive  in  exchange  $1.00." 

Since  1873,  when  the  free  coinage  of  silver  at  a  fixed 
ratio  was  abandoned,  the  United  States  has  practically 
been  on  a  gold  basis.  The  government  has  been  ready  in 
practice  to  redeem  in  gold  all  the  various  forms  of  money, 
National  Bank  notes,  greenbacks,  silver  or  silver  certifi- 
cates. 

The  monetary  convention  known  as  the  Latin  Union 
has  played  an  important  part  in  the  history  of  money  in 
Europe.  It  was  formed  December  23d,  1865,  between 
France,  Belgium,  Switzerland  and  Italy,  Greece  acceding 
to  the  convention  in  1867.  "The  object  of  the  Union 
was  the  inter-circulation  of  the  money  of  the  several 
countries,  a  regulation  which  it  was  hoped,  would  quicken 
commerce,"  and  the  maintenance  of  the  precious  metals 
at  a  parity.  The  franc  weighing  five  grammes  of  silver 
nine-tenths  fine  was  fixed  as  the  monetary  unit  of  France 
by  laws  enacted  in  1795  and  1803.  The  same  laws  pro- 
vided that  gold  pieces  be  struck,  of  which  the  weight 
should  be  one  of  gold  to  fifteen  and  a  half  of  silver.  Silver 
money  remained  the  principal  instrument  of  exchanges  in 
France  up  to  1849. 

Heavy  production  of  gold  then  depreciated  that  metal 
and  caused  silver  to  be  exported  so  that  gold  became  the 


196  Elements  of  Political  Economy 

principal  instrument  of  exchange.  Finally,  to  prevent  the 
exportation  of  the  subsidiary  silver  coins,  which  are  neces- 
sary for  small  payments,  there  were  enacted  two  laws 
(1864  and  1866)  confirmed  by  the  International  Conven- 
tion of  1865,  providing  that  the  2  franc  and  smaller  silver 
pieces  instead  of  being  made  900-1,000  should  be  835- 
1,000  fine,  i.  e.,  that  they  should  contain  less  silver  whilst 
preserving  the  same  appearance.  These  pieces  having  a 
real  value  less  than  their  nominal  value  could  not  thence- 
forth be  exported  without  loss.  But  the  law  decided  at 
the  same  time  that  one  could  not  be  forced  to  accept  more 
than  50  francs  in  this  money.  The  5  franc  pieces  retained 
their  denomination  and  weight  and  consequently  their  full 
legal  tender  quality. 

Continued  depreciation  of  silver  led  the  Latin  Union  to 
completely  suspend  the  coinage  of  5  franc  pieces  after 
1878. 

The  copper  pieces,  of  which  the  real  value  is  only  a 
fraction  of  the  nominal  value,  have  a  legal  tender  quality 
up  to  5  francs  only. 

82.  Value  of  the  Precious  Metals — Ingots  and 
money  are  but  one  and  the  same  as  merchandise.  The  dif- 
ference between  their  values  cannot  for  any  length  of  time 
exceed  the  cost  of  coinage.  In  countries  like  the  United 
States  and  England  where  the  cost  of  coinage  is  borne  by 
the  state,  a  piece  of  money  can  be  worth  neither  more  nor 
less  than  an  ingot  of  the  same  weight.  In  France  there  is 
a  charge  for  coinage  amounting  to  6  fr.  70  per  kilogram  of 
gold.  As  the  kilogram  yields  155  pieces  of  20  francs 
each,  the  value  of  the  kilogram  can  never  fall  below  3,093 
fr.  30.  It  is  easy  to  understand  why.  If  the  value  of  the 
ingot  tended  to  rise  above  the  value  of  the  coin,  people 
would  melt  down  coins  into  ingots ;  if  on  the  other  hand^ 


The  Circulation  of  Wealth  197 

ingots  tended  to  fall  below  the  value  of  the  coin,  people 
would  not  be  slow  to  take  the  ingot  to  the  mint  to  have  it 
coined. 

We  express  the  value  of  any  commodity  whatsoever 
by  its  price;  it  is  worth  ten  dollars.  If  to-morrow  we  say 
it  is  worth  eleven  or  nine  dollars,  we  know  definitely  that 
the  merchandise  in  question  has  risen  or  fallen  in  price. 
We  do  not  know  this  in  the  case  of  the  precious  metal 
adopted  as  the  money  standard  for  the  reason  that  the 
money  and  the  metal  have  a  value  which  is  almost  identical. 
We  must  reverse  the  case.  If  money  is  the  measure  of  all 
commodities,  all  commodities  taken  together  may  measure 
money.  To  take  all  commodities  is  impracticable  and  we 
ordinarily  content  ourselves  with  a  large  number.  If  we 
took  but  one  our  conclusion  would  be  of  no  value.  Ex- 
ample: Wheat  which  was  worth  59^  cents  a  bushel  in 
1896  was  worth  1.375^  in  1898.  Is  this  an  instance  of  a 
rise  in  wheat  or  a  fall  in  money  ? 

But  if  the  price  of  the  majority  of  commodities  has 
risen  a  tenth,  it  does  not  follow  that  their  value  has  risen 
in  this  proportion  because  value  being  only  a  relation,  a 
rise  or  fall  of  all  values  together  is  a  contradiction.  What 
we  may  legitimately  conclude  from  such  a  phenomenon 
is  that  the  value  of  the  precious  metal,  i.  e.,  the  relation  of 
the  commodity  used  as  the  money  standard,  has  fallen  a 
tenth.  Accordingly  we  measure  the  value  of  the  standard 
metal  in  an  apparently  opposite  manner  from  that  in  which 
we  measure  the  value  of  other  commodities — the  higher 
the  price  of  commodities  {%.  e.,  the  more  gold  required  to 
procure  them)  the  less  value  has  gold;  reciprocally,  the 
lower  the  price  of  commodities,  the  greater  is  the  value  of 
gold. 


198  Elements  of  Political  Economy 

What  is  it  that  determines  that  value  and  what  is  it 
which  causes  it  to  vary  ?     Supply  and  demand. 

Supply  first,  which  determines  demand  and  which  is 
itself  determined  by  the  existing  quantity  in  circulation 
and  limited  by  the  cost  of  production  of  new  supplies  of 
the  metal.  If  the  quantity  of  the  metal  in  circulation 
doubles  (supposing  that  commercial  activity  remains  sta- 
tionary) the  metal  will  lose  half  of  its  value.  If  the  dis- 
covery of  cheaper  processes  or  richer  mines  makes  it  pos- 
sible to  produce  gold  at  two-thirds  of  its  market  value, 
capital  and  miners  will  hurry  to  this  profitable  field  and 
there  will  result  an  abundance  of  production  which,  after 
a  certain  time,  will  probably  lower  the  value  of  gold. 
But  commercial  activity  is  not  a  fixed  quantity :  there  are, 
according  to  the  times,  more  or  less  wages  to  pay  and 
more  or  less  products  to  exchange.  These  products  may 
pass  through  a  greater  or  less  number  of  hands  and  their 
movement  may  be  more  or  less  rapid.  These  are  all  ele- 
ments which  go  to  make  up  demand.  Now  it  is  evident 
that  if  demand  had  doubled  whilst  the  supply  had  doubled, 
the  value  of  the  metal  would  be  stationary ;  but  if  the  de- 
mand had  tripled  whilst  the  supply  had  doubled,  the  metal 
would  rise  in  value. 

Variations  of  both  kinds  have  manifested  themselves. 

In  antiquity  and  during  the  Middle  Ages  the  market 
was  supplied  only  by  European  mines.  The  precious  met- 
als were  much  less  abundant  than  in  modern  times  but 
commerce  was  likewise  restricted  and  as  communication 
between  countries  was  difficult,  the  level  of  the  value  of  the 
precious  metals  remained  very  diflferent  in  different 
countries. 

It  fell  during  the  first  century  of  the  Roman  Empire, 
which  owned  all  the  mines  in  the  basin  of  the  Mediter- 


The  Circulation  of  Wealth  199 

ranean.  It  rose  in  the  fourth  century,  especially  during 
the  period  of  the  invasions  because  the  fear  of  barbarians 
caused  men  to  bury  their  treasures  and  arrested  mining. 
It  had  a  tendency  to  fall  as  a  result  of  the  Crusades  be- 
cause, although  commerce  took  on  new  life,  the  renewal  of 
mining  in  Spain,  Germany  and  Hungary  increased  the 
supply. 

It  rose  in  the  fifteenth  century  by  reason  of  the  greater 
activity  in  commerce  conjoined  with  a  stationary  output 
from  the  mines,  at  which  epoch  Columbus  discovered 
America. 

The  Spaniards  found  in  Mexico  and  Peru  mines 
whose  wealth  far  surpassed  anything  known  in  antiquity 
or  during  the  Middle  Ages.  There  followed,  and  it  was 
a  cause  of  complaint  at  the  time,  "an  excessive  dearness 
of  everything,"  i.  e.,  a  marked  and  rapid  depreciation  of 
the  precious  metals.  In  Paris,  a  given  measure  of  wheat 
which  cost  in  the  neighborhood  of  ten  grammes  of  fine 
silver  at  the  end  of  the  fifteenth  century  brought  eighty 
grammes  in  the  first  half  of  the  seventeenth  century.  At 
the  same  time  the  ratio  of  gold  to  silver  was  modified.  It 
had  been  about  i  to  12,  but  as  the  American  mines  were 
largely  silver  mines,  it  was  not  long  before  it  became  i 
to  15. 

The  difficulty  of  communication  between  distant  mar- 
kets in  the  Middle  Ages  made  possible  a  considerable  dif- 
ference in  the  value  of  the  precious  metals  in  different 
places. 

Toward  1848  the  annual  production  of  the  precious 
metals  was  a  little  more  than  40  million  dollars,  of  which 
three-fourths  was  silver  and  one-fourth  gold.  The  dis- 
coveries in  California  and  Australia  and  the  development 
of  gold  mining  in  the  Ural  and  Siberia  raised  this  produc- 


200  Elements  of  Political  Economy 

tion  to  nearly  400  million  dollars,  of  which  five-sixths  was 
gold.  As  a  consequence  the  value  of  the  precious  metals 
fell  sensibly  for  a  number  of  years  following  1848.  It 
would  have  fallen  more  but  for  the  concurrent  develop- 
ment of  commerce  which  was  stimulated  by  various 
causes. 

As  the  new  mines  produced  principally  gold,  it  was 
gold  whose  value  fell  first.  Nevertheless  since  1870,  cer- 
tain countries,  such  as  Germany,  and  practically  France 
also,  having  adopted  the  gold  standard,  and  the  silver 
mines  in  the  United  States  having  become  more  produc- 
tive, silver  in  its  turn  became  abundant  and  its  value  fell 
far  below  the  proportion  of  15^  of  silver  to  i  of  gold 
(in  1898  it  was  32  to  i).  This  history  of  the  precious 
metals  illustrates  that :  First,  the  variations  of  value  be- 
tween the  two  metals  has  been  continual,  the  ratio  of  sil- 
ver to  gold  in  the  civilized  world  having  oscillated  be- 
tween 10  to  I  and  32  to  i. 

2nd.  Variations  of  price,  i.  e.,  the  value  of  money, 
have  likewise  been  continual  and  have  been  much  more 
considerable  than  the  variation  in  the  ratio  of  the  metals. 
At  the  end  of  the  fifteenth  century  a  kilogram  of  silver 
brought  from  eight  to  ten  times  as  much  wheat  as  it  will 
to-day. 

3rd.  The  variations  of  price  have  been  most  fre- 
quently in  the  direction  of  a  fall  of  the  precious  metals. 

4th.  For  a  short  period  (and  most  exchanges  of  com- 
merce are  completed  in  a  short  period)  money  is  the  most 
exact  measure  of  value. 

5th.  A  day's  labor  or  the  price  of  wheat  have  at  times 
been  taken  as  a  comparative  measure  of  value:  they  are 
not  just  measures.  The  only  way  to  compare  the  com- 
mercial value  of  money,  i.  e.,  its  purchasing  power  in  two 


The  Circulation  of  Wealth  201 

given  epochs  or  regions  of  the  world  is  to  ascertain  in  each 
the  price  in  gold  of  a  great  number  of  different  articles  and 
to  establish  the  relation  of  the  two  series  of  prices. 

Resume 

Money  is  above  all  things  the  instrument  of  exchange. 
It  is  a  merchandise,  which,  following  the  common  law  of 
exchange,  is  sold  or  bought  for  what  it  is  worth,  but 
which  being  clothed  with  a  legal  quality  serves  as  the  gen- 
eral instrument  of  exchange,  as  a  measure  and  medium, 
and  as  the  common  denominator  in  the  comparison  of 
values. 

The  precious  metals  have  qualities  which  fit  them  for 
use  as  money :  great  value  in  small  volume,  homogeneity 
and  divisibility,  unalterability,  density,  relative  stability 
of  value. 

The  monetary  system  may  be  founded  on  either  the 
so-called  "double"  or  the  "single"  standard — the  double 
standard  furnishes  a  larger  monetary  basis.  It  lessens 
the  violence  of  fluctuations  in  the  value  of  money  but 
renders  these  fluctuations  more  frequent  and  tends  on  the 
whole  to  depreciate  money.  The  single  standard  is  a 
more  logical  system  because  it  furnishes  a  measure  which 
is  fixed — if  not  as  to  value  at  least  as  to  substance.  The 
gold  standard  is  suitable  for  rich  nations. 

Subsidiary  money  may  have  a  nominal  value  greater 
than  its  real  value  provided  its  legal  tender  quality  is 
limited. 

Ingots  and  money  are  one  and  the  same  commodity : 
there  can  exist  between  them  no  greater  difference  than 
the  cost  of  coinage. 

The  higher  the  price  of  commodities,  the  lower  the 


202  Elements  of  Political  Economy 

value  of  the  precious  metals;  the  lower  the  price  of  com- 
modities, the  higher  the  precious  metals. 

History  shows  that  the  real  value  of  gold  and  silver 
has  been  subject  to  continual  change;  that  there  has  been 
even  a  greater  and  no  less  continual  variation  in  the  price 
of  commodities;  that  the  changes  have  been  most  fre- 
quently in  the  direction  of  a  fall  in  the  value  of  the  pre- 
cious metals;  that,  for  a  short  period,  money  is  the  most 
exact  measure  of  value  but  that,  for  a  long  period,  it  be- 
comes an  inadequate  measure. 

Ill 

CREDIT 

83.  Nature  of  Credit.  84.  Influence  of  Credit.  85.  Principal 
Kinds  of  Credit.  86.  Commercial  Paper.  87.  The  Role  of  Banks. 
88.  The  Mechanism  of  Banks.  89.  Bank  Notes.  90.  Deposits,  Dis- 
counts and  Circulation.  91.  Paper  Money.  92.  Manner  of  Issuing 
Bank  Notes.     93.  American  and  Leading  European  Banking  Systems. 

83.  The  Nature  of  Credit. — Although  money  is  the 
sole  common  denominator  it  is  not  the  sole  instrument  of 
exchange.  It  has  a  powerful  ally  in  credit.  We  have  al- 
ready stated  in  a  general  manner  that  credit  consists  in 
the  exchange  of  a  real  thing  against  a  future  probability, 
1.  e.,  of  actually  existing  wealth  in  the  form  of  money,  mer- 
chandise or  any  value  whatsoever  against  the  repayment, 
at  a  future  day  and  provided  the  debtor  be  solvent,  of  the 
capital  loaned  and  of  interest  on  the  loan.  Let  us  examine 
the  nature  of  this  instrument,  credit,  taking  a  simple  case. 
The  discoverer  of  a  gold  mine  needs  machinery  with  which 
to  equip  the  mine.  He  goes  to  a  manufacturer  who  agrees 
to  supply  him  with  the  machinery  on  the  understanding 
that  he  is  to  pay  for  it  in  six  months.  We  have  here  a 
contract  which  is  advantageous  to  both  because  it  per- 


The  Circulation  of  Wealth  203 

mits  the  miner  to  operate  his  mine  and  the  machinist  to 
manufacture  machines  which  would  not  otherwise  have 
been  produced.  The  operation  is  called  "giving  credit" 
and  "buying  on  credit"  :  our  ordinary  language  is  here 
quite  in  accord  with  the  language  of  science. 

What  has  here  taken  place?  The  machinist  has  dis- 
played confidence  in  the  honesty  and  solvency  of  the  pur- 
chaser :  he  will  deliver  a  commodity  to  him  without  ex- 
acting immediate  payment  therefor,  i.  e.,  he  advances 
the  value  of  the  commodity.  The  commodity  which  the 
miner  would  not  have  been  able  to  buy  immediately  or 
perhaps  ever,  has  entered  at  once  into  circulation. 

If  the  machinist  had  regarded  the  miner  as  not  suf- 
ficiently honest  or  solvent  to  pay  for  the  machinery,  if  he 
had  not  himself  seen  some  advantage  in  selling  the  ma- 
chinery promptly,  he  would  not  have  acted  thus;  confi- 
dence and  circulation  are  then  important  factors  in  credit. 
Nevertheless,  credit  considered  in  itself  is  a  kind  of  loan, 
a  faculty  of  consuming  or  utilising  a  certain  value  belong- 
ing to  another  ivithout  giving  immediate  value  therefor. 
If  he  had  given  immediate  value,  the  exchange  would 
have  been  complete :  the  act  of  credit  is  exchange  uncom- 
pleted. It  is  in  this  very  uncertainty  of  one  of  the  two 
factors  of  this  relationship  that  credit  differs  essentially 
from  ordinary  exchange.  In  ordinary  exchange,  where 
product  is  surrendered  against  product,  the  operation  is 
at  once  complete.  In  the  case  of  credit,  the  exchange  re- 
mains suspended  until  the  debtor  has  discharged  the  debt. 
Accordingly  the  debtor  has,  for  a  certain  time,  the  use 
of  a  product  for  which  he  has  given  no  equivalent;  it  is 
certain  that  he  has  received  something,  whilst  it  is  only 
probable  that  he  will  surrender  anything.  Thence  the 
equity  of  interest,  which  he  pays  the  creditor  as  compensa- 


204  Elements  of  Political  Economy 

tion  for  the  use  of  the  commodity.  The  rate  of  interest 
is  proportionately  higher  according  as  the  risk  is  greater, 
i.  e.,  according  as  the  character  and  resources  of  the  bor- 
rower render  more  or  less  certain  the  future  payment  of 
the  debt.  All  other  forms  of  credit  are  but  more  or  less 
complicated  variations  of  this  phenomenon.  In  all  credit 
operations  there  is  then  on  the  one  hand  the  seller,  who 
is  the  lender  or  creditor,  and  on  the  other  the  buyer,  who 
is  the  borrower  or  debtor ;  between  these  two  is  the  com- 
modity which  the  former  advances  to  the  latter  because  of 
his  confidence  in  him. 

At  the  bottom  of  every  act  of  credit  there  is  an  ad- 
vance, and  it  is  this  very  advance  which  constitutes  the 
phenomenon  of  credit :  advance  upon  an  implied  promise 
to  pay,  such  as  in  the  ordinary  relations  of  a  tailor  with 
his  customers,  or  an  advance  on  an  explicit  or  written 
promise.  When  the  workman  receives  the  price  of  his 
labor  at  the  end  of  the  week,  when  the  landlord  collects  a 
month's  rent  from  his  tenant,  is  there  not  still  involved 
this  element  of  an  advance  of  services  and  an  act  of  credit? 
In  short,  as  all  products  and  labor  are  but  services,  we  may 
say  in  a  general  manner :  credit  is  an  advance  of  services. 

We  employ  the  word  credit  in  a  somewhat  different 
sense,  when  we  speak  of  "public  credit"  or  of  a  man  as 
"having  credit."  Here  we  no  longer  wish  to  designate 
the  actual  advance  of  services  but  only  the  faculty  which 
the  state  or  the  individual  possesses  of  procuring  this  ad- 
vance of  services. 

In  order  that  there  should  be  an  advance  of  services, 
there  must  needs  be  created  products,  real  wealth,  i.  e., 
a  saving  which  has  become  capital ;  one  cannot  lend  noth- 
ing. If  the  tailor  has  no  stock  he  cannot  give  a  credit. 
The  same  is  true  of  any  other  merchant  or  of  a  banker  or 


The  Circulation  of  Wealth  205 

of  a  laborer;  if  he  did  not  possess,  the  one  his  merchan- 
dise, the  other  his  money,  and  the  third  his  labor,  all  of 
them  in  short  some  real  and  exchangeable  value,  it  would 
be  just  as  impossible  for  them  to  sell  on  credit  as  for  cash. 
This  is  a  very  simple  observation  but  it  leads  to  a  most  im- 
portant truth,  a  truth  which  is  often  ignored ;  that  is,  that 
credit  must  always  he  based  upon  a  real  value;  and,  as  a 
logical  consequence  of  this,  to  another  important  truth : 
credit  is  in  itself  simply  a  change  of  ownership  and  not  a 
creation  of  capital. 

The  quantity  of  valuable  things  which  anyone  pos- 
sesses, either  in  the  capacity  of  a  proprietor  or  as  a  bor- 
rower, is  accordingly  the  limit  of  the  credit  which  he  is 
able  to  accord  at  a  given  moment.  Moreover,  one  ex- 
tends a  credit  only  to  those  who  have  a  moral  stand- 
ing sufficient  to  inspire  confidence  or  who  themselves  have 
sufficient  property  to  serve  as  a  guarantee  for  repayment 
of  the  debt.  It  is  for  these  reasons  that  there  is  so  little 
credit  in  a  poor  nation ;  in  such  a  nation  there  are  few 
capable  of  extending  a  credit  and  few  who  are  regarded  as 
worthy  of  credit.  On  the  other  hand,  in  a  rich  nation, 
credit  is  more  common  and  becomes  one  of  the  great  fac- 
tors in  economic  activity.  But  no  matter  how  rich  the 
nation,  the  credit  given  can  never  be  greater  than  the  sum 
of  the  nation's  wealth — unless  foreign  nations  step  in — 
and  it  can  never  grow  except  in  consequence  of  a  propor- 
tional growth  of  production,  for  the  simple  reason  that 
wealth  must  be  created  in  order  that  it  may  change  owner- 
ship and  be  loaned. 

84.  The  Influence  of  Credit  on  Wealth. — None  the 
less,  credit  exercises  a  very  great  influence  on  the  crea- 
tion of  wealth  and  consequently  on  the  formation  of  capi- 
tal.    Take  a  blacksmith  who  is  active,  intelligent  and  in- 


2o6  Elements  of  Political  Economy 

dustrious,  but  who  for  lack  of  money,  has  long  remained 
a  day  laborer,  earning  with  difficulty  sufficient  for  his  daily 
maintenance.  A  capitalist  lends  him  $i,ooo  with  which 
he  is  able  to  rent  a  small  shop,  construct  a  forge,  buy  tools, 
fuel  and  raw  material  and  set  up  for  himself.  Out  of  the 
i,ooo  dollars  only  600  dollars  have  been  spent  in  installing 
himself,  the  remaining  400  dollars  having  been  laid  out  on 
raw  material,  which  under  his  hammer  is  changed  into 
various  objects  and  increases  in  value  threefold.  The  sale 
of  these  objects  brings  ready  money  with  which  he  buys 
additional  raw  material  and  after  a  certain  time  he  is  able 
to  pay  back  the  1,000  dollars  which  he  has  borrowed  and 
has  remaining  to  him  his  shop  and  a  small  working  capital. 
It  is  the  original  loan  of  1,000  dollars  which  has  wrought 
this  change,  raising  a  man  from  an  inferior  position  and 
enriching  society  by  the  value  of  his  product ;  such  is  the 
power  of  credit. 

Land  has  been  allowed  to  lie  waste  in  the  hands  of  an 
incapable  or  thriftless  owner.  Some  one  purchases  it 
through  the  aid  of  borrowed  capital  and  in  a  few  years 
makes  it  yield  sufficient  to  pay  off  the  debt.  Society  is  en- 
riched through  the  successful  management  of  the  farm  and 
this  result  was  made  possible  by  credit. 

Examples  of  this  kind  are  innumerable.  Question  the 
manufacturer  and  the  merchant  you  meet.  Most  of  them 
will  tell  you  that  at  the  beginning  of  their  career  they  had 
recourse  to  loans  and  that  it  was  credit  which  enabled 
them  to  make  their  first  ventures. 

Without  credit  hardly  anyone  would  be  capable  of 
practicing  an  industry  or  conducting  a  mercantile  business 
except  those  who  had  inherited  the  means  and  the  small 
majority,  who,  as  wage  earners,  had  accumulated  a  capital 
which  would  enable  them  to  set  up  for  themselves.     What 


The  Circulation  of  Wealth  207 

intelligence  and  what  diverse  and  precious  faculties  would 
remain  unproductive  and  how  much  poorer  would  society 
be  as  a  whole  without  the  beneficent  influence  of  credit, 
i.  e.,  without  the  change  of  ownership  of  capital  which 
goes  to  associate  itself  with  labor. 

Moreover,  it  is  not  only  in  the  initial  stages  of  indus- 
trial activity,  but  in  all  stages  and  branches  of  it,  that 
credit  exercises  its  salutary  influence. 

A  tradesman,  already  well-to-do,  has  a  capital  of 
20,000  dollars  invested  in  merchandise. 

Suppose  there  be  no  such  institution  as  credit.  The 
tradesman  is  able  to  procure  new  goods  only  as  he  sells 
the  old,  and  since  all  sales  are  for  cash  only,  many  would- 
be  customers  are  themselves  obliged  to  suspend  their  pur- 
chases five  or  six  months  until  the  things  they  have  pro- 
duced are  sold  and  paid  for  and  they  themselves  have 
ready  money.  It  may  be  a  year  before  the  tradesman's 
sales  amount  to  20,000  dollars,  and  before  new  merchan- 
dise, purchased  in  proportion  to  his  sales,  replaces  entirely 
the  old  stock.  He  runs  the  risk  of  having  his  goods  de- 
teriorate through  age.  If  he  bases  his  transactions  upon  a 
profit  of  15^  his  total  gains  are  but  3,000  dollars. 

Now  suppose  credit  does  exist.  The  same  tradesman 
finds  immediate  customers  to  whom  he  surrenders  his 
goods  under  the  simple  promise  to  pay  in  three  months. 
By  himself  engaging  to  pay  for  goods  in  three  months  he 
renews  his  stock  without  exhausting  his  cash.  In  fact, 
his  pa\Tnents  are  made  with  the  money  his  customers  pay 
him  at  maturity  of  their  credit.  Accordingly  in  three 
months  he  sells  as  much  as  without  the  institution  of 
credit  it  would  have  been  possible  for  him  to  sell  in  a 
year.  His  turnover  is  20,000  dollars  every  three  months 
and  his  stock  is  not  so  apt  to  lose  in  value  through  change 


2o8  Elements  of  Political  Economy 

of  fashion  or  deterioration.  With  benefit  to  his  customers 
he  contents  himself  with  a  profit  of  io%  on  each  article 
instead  of  15%,  and  his  annual  profits  are  8,000  dollars 
instead  of  3,000  dollars. 

Applied  to  all  engaged  in  production  and  commerce 
who  in  some  such  manner  give  and  receive  credit,  the  sys- 
tem stimulates  production  and  increases  considerably  the 
effectiveness  of  economic  activity.  Accordingly  it  should 
be  fostered  not  only  for  the  well-being  of  those  who  may 
for  the  moment  be  without  resources,  but  in  order  to  give 
added  efficiency  to  those  who  have  already  acquired  prop- 
erty. 

Admit,  in  summing  up  this  analysis,  that  credit  strictly 
speaking  creates  nothing,  that  it  is  a  simple  displacement 
of  capital ;  nevertheless  in  transporting  capital  to  a  place 
where  it  can  be  employed  most  profitably,  in  furnishing 
tools  to  labor,  in  rendering  active  that  which  was  inactive, 
and  fertilizing  that  which  was  sterile,  this  simple  displace- 
ment introduces  a  profound  modification  into  the  economy 
of  society ;  it  renders  production  more  active  and  increases 
wealth. 

We  must  never  lose  sight  of  either  of  these  two  aspects 
of  the  question.  In  viewing  it  as  a  whole,  one  is  forced 
to  conclude  that  credit,  which  is  determined  by  confidence, 
is  an  advance  of  services,  made  either  in  the  form  of  actual 
labor  or  of  products  previously  created,  that  it  makes  cir- 
culation more  rapid  and  consequently  increases  wealth. 

85.  The  Principal  Kinds  of  Credit. — Credit  appears 
quite  as  often  in  the  form  of  an  advance  of  labor  as  in  the 
form  of  an  advance  of  merchandise.  In  fact,  all  the 
goods  which  are  surrendered  on  credit  by  the  merchant 
have  been  produced  on  credit  by  the  workman  who  has 
been  paid  neither  each  hour  nor  each  day  for  his  services. 


The  Circulation  of  Wealth  209 

Take  the  accounts  some  Friday  evening  in  the  whole  field 
of  production  in  the  United  States.  .  The  five  and  a  third 
million  men,  women  and  children  which  the  manufactur- 
ing industry  employs  have  made  to  their  employers  an  ad- 
vance of  five  days  of  labor,  let  us  say,  at  $1.40  per  day, 
more  than  37  million  dollars.  Add  to  this  the  earnings 
.of  clerks,  agricultural  laborers,  employees  of  transporta- 
tion companies,  and  domestic  servants,  and  we  arrive  at  a 
vast  sum.  Nevertheless,  as  it  does  not  appear  ordinarily 
in  the  form  of  a  written  contract  it  passes  almost  un- 
noticed. 

When  we  speak  of  credit  we  generally  mean  an  ad- 
vance of  merchandise  or  things ;  furthermore,  as  merchan- 
dise is  valued  in  terms  of  money,  it  is  generally  in  money 
or  specie  that  the  contract  is  closed  and  payment  made 
for  the  service  advanced.  The  transaction,  thus  far  in  a 
condition  of  suspense  or  imperfection,  is  completed  by  the 
delivery  of  the  specie  or  its  equivalent  which  the  debtor 
has  promised. 

Accordingly  credits  are  distinguished  less  by  the  char- 
acter of  the  merchandise  furnished  than  by  the  character 
of  the  guarantees  given  by  the  borrower.  They  may  be 
separated  into  four  classes  : 

I.  Simple  or  direct  credit  is  the  primitive  form  of  ad- 
vances which  men  make  to  each  other.  The  savage  who 
has  been  more  fortunate  in  the  chase  than  his  companion 
lends  him  some  of  his  game  for  food,  a  loan  which  the 
latter  engages  to  return  on  the  next  hunt.  The  farmer 
who  fails  to  use  all  his  corn  lends  some  of  it  to  a  poor 
neighbor  to  plant,  the  latter  promising  to  return  its  value 
with  interest  at  harvest  time.  Nothing  could  be  simpler 
than  such  a  contract.  It  is  a  form  of  credit  still  found 
in  common  daily  practice.     The  advance  of  services  which 

14 


2IO  Elements  of  Political  Economy 

the  workman  makes  to  his  employer,  the  merchandise 
which  the  butcher  and  baker  and  grocer  furnish  their 
customers  on  credit,  the  clothes  which  the  tailor  and  dress- 
maker deliver  without  exacting  payment  in  cash,  are  all 
forms  of  direct  loans.  No  written  contract  binds  the  two 
parties ;  the  books  of  the  vendor  are  often  the  sole  evi- 
dence of  the  credit ;  it  is  based  exclusively  on  confidence. 
Such  a  credit  must  be  classed  as  personal  credit,  because  its 
basis  is  the  opinion  which  we  entertain  of  a  person  who 
borrows,  much  more  than  the  value  of  the  things  which  he 
is  able  to  offer  as  guarantee. 

Merchandise  thus  surrendered  is  often  consumed  with- 
out producing  directly  any  new  merchandise  which  would 
serve  for  payment.  When  coal  is  sold  to  a  dealer  or  man- 
ufacturer, the  vendor  has  reason  to  suppose  that  the  value 
of  the  coal  will  be  found  eventually  in  the  cash  box  of  his 
customer  who  has  either  resold  it  or  consumed  it  in  manu- 
facturing articles  which  have  a  market  value.  But  when 
it  is  sold  to  an  individual  for  use  in  his  private  kitchen  the 
vendor  may  well  ask  what  is  to  become  of  his  merchan- 
dise, particularly  if  he  is  not  to  expect  payment  until  the 
end  of  several  months,  when  the  coal  will  have  been  con- 
sumed. Here  there  is  no  other  guarantee  than  the  hon- 
esty and  resources  of  the  buyer :  the  credit  is  purely  per- 
sonal. Despite  the  risks  connected  with  it,  credit  oiffers 
so  many  conveniences  that  it  is  constantly  practiced  and  it 
would  be  impossible  to  abolish  it  in  a  civilized  community. 
How  could  we  get  along  if  we  were  compelled  to  have  our 
purse  constantly  at  hand,  to  pay  each  service  the  moment 
it  is  rendered,  to  settle  hour  by  hour  and  minute  by  minute 
the  wages  of  workmen  and  servants  ? 

Nevertheless,  there  are  certain  practices  in  connection 
with  this  form  of  simple  credit  which  forces  us  to  conclude 


The  Circulation  of  Wealth  211 

that  it  is  not  without  its  dangers.  "Little  credits  ruin 
Httle  people,"  says  the  proverb,  and  it  is  true.  The  poor 
are  tempted  to  procure  the  pleasures  which  their  means  do 
not  afford.  When  credit  is  offered  them  it  is  generally  ac- 
cepted without  a  thought  of  the  morrow.  But  to-morrow 
comes  and  the  bill  must  be  paid.  If  not,  one  falls  into 
debt;  and  when  the  possibility  of  procuring  enjoyments 
without  paying  for  them  has  presented  itself,  it  is  difficult 
to  discharge  a  debt  without  contracting  another,  and  the 
victim  is  caught  in  the  fatal  mesh.  Some  dealers  or 
money  lenders  speculate  on  this  weakness.  In  certain 
countries  in  America  such  credits  have  the  effect  of  sub- 
jecting the  workman  to  a  kind  of  bondage.  For  the  man 
of  small  means  cash  payments  are  the  surest  method  of  ac- 
commodating outlay  to  income.  Although  it  subjects  one 
for  the  moment  to  inconveniences,  it  will  avoid,  in  the  long 
run,  more  serious  inconveniences  and  perhaps  even  priva- 
tion. 

2.  The  chattel  loan  is  the  second  kind  of  credit.  This 
differs  radically  from  the  preceding.  In  the  former  case 
the  credit  was  personal,  in  the  latter  it  is  real,  i.  e.,  it  has 
for  security  a  thing,  a  real  value.  A  merchant  has  fifty 
pieces  of  cloth.  Owing  to  circumstances  which  he  failed 
to  foresee,  the  cloth  does  not  sell  and  he  needs  money  to 
pay  his  rent.  He  goes  to  a  capitalist  who  agrees  to  lend 
him  200  dollars  on  condition  that  he  place  with  him  as  a 
pledge  twenty  pieces  of  cloth,  worth  perhaps  double  the 
loan,  to  be  surrendered  on  payment  of  the  debt.  This  is 
a  chattel  loan.  That  which  distinguishes  it  from  the 
credit  previously  discussed  is  that  the  lender  holds  in  his 
own  hands  as  security  a  value  at  least  equal  to  that  with 
which  he  has  parted.  This  form  of  loan  appears  not  to 
expose  the  lender  to  any  risk ;  but  it  is  far  from  stimulating 


212  Elements  of  Political  Economy 

commerce  as  much  as  simple  credit  for  the  reason  that  it 
puts  in  circulation  the  sum  borrowed  only  by  locking  up 
the  merchandise  given  as  security. 

It  is  accordingly  an  imperfect  form  of  credit.  It  is 
born  of  mistrust  and  one  frequently  finds  it  used  in  uncer- 
tain times  and  under  conditions  where  confidence  is  lack- 
ing. The  Jews,  whose  commercial  transactions  were  hin- 
dered rather  than  protected  by  the  laws  of  the  Middle 
Ages,  made  chattel  loans  almost  exclusively.  Usurers 
often  make  chattel  loans.  To-day  still,  during  industrial 
crises,  chattel  loans  increase.  On  the  other  hand,  when 
commerce  prospers  and  confidence  reigns,  merchants  find 
it  easy  to  sell  their  wares  and  seldom  think  of  depositing 
them  to  obtain  a  loan  smaller  than  the  selling  price  of  the 
goods. 

There  are,  however,  certain  forms  of  loans  on  pledge 
which  are  not  open  to  the  above  objections ;  such  are  ad- 
vances on  warrants.  Warrants  are  certificates  of  deposit 
for  merchandise  in  depots  or  public  warehouses.  This 
merchandise  cannot  be  withdrawn  except  on  presentation 
of  the  certificates  which  may  circulate  by  endorsement 
from  one  owner  to  another.  The  owner  may  not  only  sell 
on  the  warrant,  but  may  borrow  on  it  by  depositing  it  with 
the  lender.  This  surrender  of  the  warrant  constitutes  a 
veritable  pledge,  but  a  form  of  pledge  which  does  not  pre- 
vent the  owner  from  showing  his  merchandise  and  offer- 
ing it  to  his  customers. 

Chattel  loans  are  still  much  used  and  the  system  has  its 
uses,  particularly  for  the  poor. 

3.  The  mortgage  is  another  form  of  loan  on  pledge. 
It  belongs  to  this  same  class  of  real  credits.  But  it  differs 
from  the  foregoing;  first,  in  that  the  pledge  is  not  mer- 
chandise, nor  an  article,  but  real  estate,  land  or  houses  or 


The  Circulation  of  Wealth  213 

fixtures ;  second,  in  that  the  pledge  instead  of  being  with- 
drawn from  use  in  the  hands  of  the  lender  remains  in  pos- 
session of  the  borrower  and  may  be  made  productive. 
The  reason  for  this  discrimination  is  plain.  When  the 
pledge  is  an  article  which  can  be  transported,  the  bor- 
rower might  sell  or  destroy  it  if  left  in  his  possession. 
With  real  property  this  is  impossible :  the  lender  in  the 
latter  instance  is  always  sure  of  finding  the  property  which 
has  been  pledged.  Some  countries,  such  as  France,  have 
banking  institutions  organized  for  the  purpose  of  lending 
upon  real  property.  These  institutions  make  loans  in  the 
form  of  negotiable  obligations  which  they  pay  out  to  bor- 
rowers; they  are  reimbursed  by  annual  payments  which 
the  borrower  agrees  to  make,  and  which  include  provision 
for  interest  and  generally  discharge  of  the  principal. 

The  advantages  of  the  mortgage  loan  over  the  chattel 
loan  are  manifest.  The  latter,  by  locking  up  merchandise, 
renders  it  in  a  measure  sterile;  the  former  promotes  the 
circulation  of  wealth  by  furnishing  needed  capital  to  the 
borrower  without  taking  the  land  out  of  cultivation,  since 
the  owner  continues  to  occupy  it  or  may  even  sell  it  subject 
to  the  mortgage  which  then  becomes  a  debt  of  the  new 
owner. 

4.  The  direct  loan  is  a  personal  credit;  the  chattel 
loan  and  the  mortgage  loan  are  material  credits.  Com- 
mercial credits  partake  of  the  nature  of  both  and  are  su- 
perior to  all  other  forms  of  credit.  Commercial  credit  is 
the  result  of  a  business  transaction,  sale  of  goods  or  ad- 
vance of  capital,  made  by  one  business  man  to  another; 
consequently  not  with  a  view  to  its  unproductive  consump- 
tion, but  with  a  view  to  the  resale  of  the  goods,  or  its  con- 
sumption in  some  productive  industry,  like  the  coal  we 
instanced  above. 


214  Elements  of  Political  Economy 

This  form  of  credit  offers  more  security  to  the  lender 
than  simple  credit,  since  it  reposes  upon  a  value  which 
ought  to  become  productive  in  the  hands  of  the  borrower. 
It  procures  for  the  borrower  more  advantages  than  the 
chattel  loan,  since  it  does  not  tie  up  a  portion  of  his  pos- 
sessions. The  terms  of  repayment  are  not  so  easy  as  in 
the  case  of  mortgage  loans.  If  payment  is  not  made  at 
maturity,  the  creditor  is  authorized  to  seize  the  goods  of 
the  debtor,  who  knows  the  prompt  rigor  of  the  law  and  is 
loath  to  run  this  risk.  Hence  promptness  on  the  part  of 
one  and  confidence  on  the  part  of  the  other.  It  is  in  this 
form  especially  that  credit  becomes  an  instrument  of  ex- 
change and  vies  with  money  in  promoting  the  circulation 
of  wealth. 

5.  A  person  may  be  capable  of  employing  borrowed 
capital  profitably  and  fail,  nevertheless,  to  inspire  suffi- 
cient confidence  to  procure  it ;  as  for  example  in  the  case 
of  an  artisan  who  needs  tools,  a  seamstress  who  wants  a 
sewing  machine,  a  shopman  pressed  for  his  rent,  a  small 
manufacturer  who  lacks  means  to  procure  sufficient  raw 
material  for  his  business.  This  difficulty  is  sometimes 
overcome  by  such  persons  joining  a  society  in  which  all 
the  members  hold  themselves  collectively  responsible  for 
loans  made  through  the  society  to  any  of  its  members. 
Wise  combinations  may  thus  supply  confidence  which 
would  not  be  extended  to  the  individual,  and  succeed  in 
procuring  for  him  a  commercial  credit. 

6.  Public  credit  proceeds  from  the  confidence  which 
private  capital  reposes  in  the  state.  That  confidence  has, 
as  its  foundation,  wealth  and  solvency  just  as  in  the  case 
of  an  individual.  It  displays  itself  in  the  ease  with  which 
governments  and  public  administrative  bodies  borrow,  and 


The  Circulation  of  Wealth  215 

in  the  quotations  for  the  various  certificates  of  debt  they 
issue. 

With  public  credit  may  be  classed  the  credit  of  great 
corporations,  such  as  railways,  which  issue  stocks  and 
bonds. 

Public  and  private  credit  give  rise  to  a  quantity  of 
stocks  and  bonds  which  are  sold  and  bought  like  merchan- 
dise. 

86.  Commercial  Paper. — Commercial  credit  takes 
several  forms : 

1.  A  cotton  manufacturer  sells  200  dollars  worth  of 
cloth  to  a  merchant  who  is  not  prepared  to  pay  cash,  and 
who  accordingly  gives  a  simple  note  couched  somewhat  as 
follows : 

"Sixty  days  after  date  I  promise  to  pay  John  Smith 
the  sum  of  200  dollars,  for  value  received." 

This  is  the  first  form  of  commercial  credit.  It  has  one 
inconvenience  which  causes  it  to  be  but  little  used,  viz.:  It 
ties  up  one  of  the  two  terms  of  the  transaction.  The  cloth 
is  resold  and  sold  again ;  but  the  promise  to  pay  cannot 
circulate  because  it  is  payable  only  to  John  Smith,  and  the 
creditor  must  carry  the  note  until  it  matures. 

2.  "Sixty  days  after  date  I  promise  to  pay  to  bearer 
the  sum  of  200  dollars,  for  value  received." 

This  second  form  is  the  note  payable  to  bearer,  the  use 
of  which  is  likewise  restricted  because  of  certain  other  in- 
conveniences. It  may  circulate,  but  if  lost  or  stolen  the 
possessor  may  collect  the  sum  at  maturity  as  if  he  were  the 
legitimate  owner.  The  seller  has  accepted  the  note  be- 
cause he  has  confidence  in  his  customer,  but  a  third  person 
to  whom  he  desires  to  pass  it  may  not  know  the  maker  of 
the  note;  a  fourth  and  fifth  person  is  still  less  apt  to  know 
him  and  will  refuse  it  if  offered  in  payment  of  a  debt,  Ac- 


2i6  Elements  of  Political  Economy 

cordingly,  though  such  a  note  pass  from  the  hands  of  its 
first  recipient  it  will  not  circulate  far. 

3.  It  is  necessary  to  find  a  form  of  note  which  may 
circulate  and  at 'the  same  time  inspire  confidence  in  those 
to  whom  it  is  offered  in  payment  of  a  debt.  This  is  ac- 
complished by  the  following : 

"Sixty  days  after  date  I  promise  to  pay  to  the  order  of 
John  Smith  the  sum  of  200  dollars,  for  value  received." 

The  addition  of  the  words  "to  the  order  of"  solves  the 
problem.  When  the  recipient  John  Smith  desires  to  pass 
the  note  in  payment  of  his  own  debts  he  endorses  it  to  the 
order  of  the  new  payee.  Here  there  is  no  danger  of  the 
note  going  astray  because  it  is  now  payable  only  to  the 
last  person  to  whom  it  has  been  endorsed.  Nor  is  there 
much  danger  of  its  being  dishonored,  because  each  en- 
dorser is  made  responsible  for  the  payment  of  the  note 
under  the  law  in  the  order  of  his  endorsement.  And  the 
law  is  quite  just,  for  we  must  not  lose  sight  of  the  fact  that 
the  paper  is  not  a  payment,  but  a  promise  to  pay.  If  the 
promise  is  not  fulfilled  those  who  have  passed  the  note 
to  their  creditors  are  none  the  less  obligated  to  discharge 
the  debt.  It  follows  that  no  matter  who  the  maker  of  the 
note  may  be,  recipients,  as  the  note  circulates,  need  concern 
themselves  only  with  the  last  endorser  with  whom  they,  as 
a  rule,  have  transactions  and  whom  they  know. 

In  the  case  of  the  note  made  payable  to  bearer  the 
further  it  circulates  from  the  place  of  its  origin  the  less 
confidence  it  inspires ;  whilst  with  a  note  payable  to  the 
order  of  specific  persons,  the  more  it  circulates,  i.  e.,  the 
more  endorsements  it  receives,  the  more  secure  it  becomes. 
This  third  form  of  commercial  credit  which  permits  both 
terms  of  the  transaction  to  circulate  before  the  transaction 
is  really  completed  by  a  definite  payment  clearly  attains  the 


The  Circulation  of  Wealth  217 

ends  which  all  credit  proposes,  and  for  this  reason  it  is  the 
most  commonly  used. 

4.  There  is  still  another  form  of  credit  much  used  in 
commerce,  especially  in  foreign  commerce.  As  a  rule  a 
debtor  is  never  in  a  hurry  to  pay  his  debts  nor  to  substi- 
tute for  simple  credit  the  commercial  credit,  or  note,  to 
which  he  affixes  his  signature,  and  by  which  he  exposes 
his  goods  to  the  danger  of  seizure  if  the  note  is  not  hon- 
ored at  maturity.  Moreover  it  often  happens  that  seller 
and  buyer  do  not  live  in  the  same  place.  The  note  under 
such  conditions  is  not  the  most  convenient  form  of  credit. 
If  the  seller  has  need  of  money  he  may  draw  a  bill  on  his 
customer  as  follows : 

"Sixty  days  after  sight  please  pay  to  the  order  of  John 
Jones  the  sum  of  200  dollars,  for  value  received."  Signed 
and  dated,  and  at  the  bottom  the  words  "To  John  Smith, 
New  Orleans." 

This  fourth  form  is  termed  a  draft  or  bill  of  exchange. 
The  draft  is  the  reverse  of  the  note.  In  the  latter  it  is  the 
debtor  who  promises  to  pay ;  in  the  former  it  is  the  creditor 
who  orders  him  to  pay. 

It  is  always  wise  and  often  indispensable  to  notify  the 
debtor  that  one  is  about  to  draw  upon  him,  and  further- 
more to  present  the  draft  to  him  for  acceptance,  which  is  a 
formal  acknowledgment  of  the  draft.  Failing  such  ac- 
ceptance, the  drawee  is  not  bound  to  anything  and  may  re- 
fuse to  pay  the  draft  when  presented  at  maturity. 

Even  before  it  has  circulated,  the  bill  of  exchange 
which  has  been  accepted  has  already  considerable  security. 
The  bearer  of  the  bill,  which  carries  two  signatures,  that 
of  the  drawer  and  drawee  who  has  accepted  it,  can  look  to 
both  for  payment.  If  he  himself  negotiates  it.  it  is 
strengthened  by  a  third  signature,  etc. 


2i8  Elements  of  Political  Economy 

87.  The  Role  of  the  Banks. — We  know  that  credit  is 
not  gratuitous :  every  service  must  be  compensated. 

When  a  merchant  extends  credit  the  advantage  to  him 
resides  in  the  sale  of  merchandise  it  enables  him  to  effect ; 
better  accept  a  good  note  at  sixty  or  ninety  days  with 
which  new  stock  may  be  purchased  than  keep  merchandise 
sixty  or  ninety  days  longer  in  the  hope  of  making  a  cash 
sale.  Ordinarily  when  the  purchaser  does  pay  cash  he  is 
allowed  a  small  discount,  or  diminution  of  the  bill :  to  ac- 
cept his  note  is  but  another  manner  of  granting  a  diminu- 
tion of  the  price.  The  desire  to  make  sales  is  the  reason 
why  credits  are  granted,  and  it  is  natural  that  some  pay- 
ment should  be  made  for  the  satisfaction  of  such  desire. 

If  the  same  merchant  should  wish  to  give  his  note,  not 
in  exchange  for  merchandise,  but  for  the  exact  sum  of 
money  for  which  the  note  calls,  he  could  not  do  so,  because 
in  ordinary  times  no  one  wants  to  exchange  a  real  value 
for  a  promise  to  pay;  i.  e.,  to  exchange  more  for  less. 

To  cash  a  note  or  draft  is  to  lend  money  until  the  note 
or  draft  matures,  and  such  loan,  like  every  other,  should 
yield  interest.  This  interest,  which  is  no  less  just  in  this 
case  than  in  others,  takes  the  name  of  discount. 

John  Jones,  to  whom  the  draft  for  200  dollars  on  John 
Smith  has  been  sent,  has  need  of  money  to  pay  his  em- 
ployees. According  to  the  terms  of  the  draft  he  must  wait 
sixty  days  before  he  can  demand  the  money  of  John  Smith. 
He  accordingly  proceeds  to  find  some  one  who  has  money; 
he  endorses  the  draft  to  such  person  and  receives  from 
him  the  sum  of  200  dollars  less  the  interest  on  that  amount 
for  sixty  days,  say  198  dollars,  the  rate  of  interest  being 
6%. 

This  is  the  transaction  known  as  discounting  paper. 
But  the  merchant  and  manufacturer  can,  as  a  rule,  make 


The  Circulation  of  Wealth  219 

their  money  yield  them  a  greater  return  than  6  Jo  and  are 
little  disposed  to  discount  paper  for  others.  This  fact 
gives  rise  to  the  need  of  establishments  which  make  a 
business  of  discounting  commercial  paper. 

Again,  a  manufacturer  in  Boston  has  a  payment  to 
make  in  New  Orleans.  As  it  is  costly  and  difficult  to  send 
actual  money,  which  might  be  lost  or  stolen  in  transit,  he 
seeks  at  home  an  institution  which  will  give  him  in  ex- 
change for  his  money  a  bill  of  exchange  payable  at  New 
Orleans,  the  very  bill  perhaps  which  John  Jones  has  just 
had  discounted,  i.  e.,  taken  cash  for. 

There  are  persons  who  in  one  form  or  another  desire 
to  borrow  money.  Others  desire  to  lend  it,  but  do  not 
know  any  borrowers,  or  are  not  ready  to  trust  such  as 
come  to  them.  The  needs  of  both  parties  call  for  a  com- 
mon institution  which  shall  put  them  in  touch  with  each 
other. 

These  institutions  are  the  banks,  which  in  a  manner 
are  centers  of  credit.  They  receive  and  amass  the  capital 
of  such  persons  as  desire  to  lend  money,  and  disperse  it  to 
persons  who  desire  to  borrow  it.  The  bank,  which  is  an 
indispensable  instrument  of  credit,  may  be  called  a  reser- 
voir of  capital,  which  flows  to  and  from  it.  As  the  mer- 
chant trades  in  wares,  so  the  banker  trades  in  capital  and 
credit.  Such  as  have  money  to  lend  bring  it  to  him  and  he 
buys  the  use  of  it  by  paying  them  interest;  it  is  after  all 
credit  which  he  buys,  since  these  deposits  which  his  clients 
make  are  but  advances  of  merchandise. 

Such  as  need  money  come  to  him  to  buy  it,  in  the  form 
of  a  direct  loan,  a  loan  on  security,  a  discount,  or  sale  of 
commercial  paper.  It  is  credit  which  he  sells  when  he 
advances  a  value  which  will  be  reimbursed  but  slowlv.  and 


220  Elements  of  Political  Economy 

like  every  business  man  he  aims  to  sell  his  wares  (i.  e.,  his 
capital  or  credit)  higher  than  he  buys  it. 

It  is  accordingly  easy  to  grasp  the  importance  of  the 
role  which  the  bank  plays  in  the  circulation  of  capital. 

88.  The  Mechanism  of  Banks. — When  a  bank  is 
founded  it  possesses  a  certain  capital.  But  no  matter 
what  this  be,  it  constitutes  ordinarily  but  a  fraction  of  the 
total  operations  of  the  bank.  One  portion  of  the  capital, 
that  invested  in  the  expense  of  establishing  the  institution, 
becomes  fixed.  Another  portion  may  be  invested  in  stocks 
or  bonds  or  real  estate  in  order  to  give  a  certain  stability 
to  the  bank.  Only  the  remainder  of  the  capital  is  there- 
fore in  a  form  to  be  employed  directly  in  the  operations  of 
commerce;  but  the  profits  from  this  may  increase  each 
year. 

I.  Many  people,  as  we  have  said,  carry  to  the  bank 
the  money  for  which  they  have  no  immediate  need ;  indi- 
viduals to-day  are  not  disposed  to  leave  their  money  idle  in 
their  cash  drawers.  The  bank  thus  collects  the  savings  of 
the  capitalist  and  the  workman,  money  not  needed  by  the 
business  man,  and  funds  which,  finding  no  immediate  em- 
ployment, seek  a  place  of  deposit  which  is  safe,  and  from 
which  they  may  be  easily  withdrawn.  It  attracts  and  re- 
tains this  capital,  generally  paying  interest  upon  it.  Thus 
it  is  that  it  buys  the  use  of  capital,  otherwise  called  the  in- 
strument of  credit.  Capital  thus  loaned  is  called  deposits. 
The  depositor,  according  to  usage,  may  withdraw  the  de- 
posit at  sight,  or  by  giving  a  certain  notice ;  he  may  with- 
draw all  or  part  of  it,  directly  in  person,  or  by  giving 
those  to  whom  he  owes  money,  checks  or  orders  on  the 
banks. 

In  thus  making  small  as  well  as  large  savings  produc- 
tive, the  bank  stimulates  saving,  which  is  the  mother  of 


The  Circulation  of  Wealth  221 

capital  and  of  wealth,  and  renders  thereby  a  double  serv- 
ice, a  serivce  in  connection  with  the  capital  it  utilizes  and 
in  connection  with  the  capital  of  which  it  stimulates  the 
formation. 

2.  Banks  receive  capital  otherwise  than  by  borrow- 
ing and  by  time  deposits.  A  business  man  is  required  to 
receive  and  pay  out  moneys  every  day.  To  rid  himself 
of  the  trouble  of  handling  cash  he  may  send  his  money  to 
the  bank.  Henceforth  it  is  the  bank  that  receives  and  pays 
out  for  him ;  he  need  only  issue  his  orders.  In  this  case 
it  limits  itself  nearly  always  to  the  role  of  cashier ;  i.  e.,  it 
pays  out  only  so  much  as  it  has  on  hand  belonging  to  the 
depositor,  a  fact  which  is  expressed  by  stating  that  the  bal- 
ance must  always  be  in  favor  of  the  depositor.  Here  it 
manifestly  makes  no  advances  to  the  merchant ;  on  the  con- 
trary, it  is  the  merchant  who  extends  a  credit  to  the  bank 
by  sending  to  it  in  advance  sums  which  he  will  check  out 
later.  Of  course  he  does  this  only  because  he  finds  it  ad- 
vantageous, though  some  banks  now  allow  interest  on 
daily  balances. 

In  many  large  cities  there  exists  what  is  known  as  the 
Clearing  House,  an  institution  through  which  the  local 
banks  regulate  their  debts  to  each  other  by  a  simple  ex- 
change of  checks  and  paper. 

3.  Business  men  send  not  only  cash  and  checks  to  the 
bank  for  deposit,  but  use  the  bank  likewise  for  the  collec- 
tion of  commercial  paper.  For  this  service  the  bank 
charges  a  small  commission,  the  sum  realized  on  the  note 
or  draft  being  credited  to  the  depositor's  account.  Until 
such  collection  is  made  the  bank  is  the  mere  agent. 

Thus  far  we  have  examined  but  two  aspects  of  the 
bank,  that  in  which  it  figures  as  a  buyer  of  credit,  and  that 
in  which  it  figures  as  agent  for  the  collection  of  notes  and 


222  Elements  of  Political  Economy 

drafts  when  it  does  not  endorse  these  latter  and  put  them 
in  circulation.  Let  us  see  what  it  does  with  the  credit  it 
buys  and  how  it  launches  it  again  upon  the  sea  of  com- 
merce. 

4.  Not  all  business  men  have  a  bank  account,  and 
such  as  have  are  not  always  disposed  to  keep  the  commer- 
cial paper  that  comes  to  them  until  maturity.  They  may 
need  money.  To  procure  it  they  take  such  paper  to  a 
bank  for  discount.  The  bank  by  virtue  of  its  cash  reserve 
can  give  them  cash,  retaining,  as  we  have  said,  an  amount 
equivalent  to  the  interest  on  the  sum  to  maturity  as  its 
profit. 

In  general  the  bank  accepts  bills  of  exchange  and  notes 
of  which  the  payment  is  not  too  distant  and  which  are 
guaranteed  by  at  least  two  signatures,  two  signatures  giv- 
ing to  the  bank  recourse  to  two  persons  for  payment.  A 
single  signature  which  can  be  no  other  than  that  of  the 
person  demanding  the  credit,  would  change  the  discount 
into  a  direct  loan. 

The  paper  discounted  by  the  bank  constitutes  its  dis- 
counts. The  bank  is  the  owner  of  them  because  it  has 
bought  them  with  cash ;  it  collects  them  at  maturity  for  its 
own  account  and  in  this  way  replenishes  the  void  in  its 
reserve  which  has  been  caused  by  discounting  the  paper. 
There  remains  to  it,  moreover,  as  profit  the  discount,  or  at 
least  the  difference  between  the  rate  of  discount  and  the 
interest  it  may  be  paying  depositors.  This  is  one  of  the 
most  important  operations  of  the  bank,  that  by  which  it 
ordinarily  extends  its  credits  to  commerce. 

5.  A  bank  does  not  necessarily  itself  collect  at  matu- 
rity the  paper  it  discounts;  nor  even  that  which  it  is 
charged  with  collecting.  We  know  how  drafts  are  pre- 
ferred to  cash  for  making  distant  payments.     The  banks 


The  Circulation  of  Wealth  223 

supply  these  drafts.  They  always  have  for  sale  a  supply 
of  notes  or  drafts  at  the  current  rate  of  exchange,  in  this 
case  acting  simply  as  intermediaries  of  exchange.  Should 
they  be  without  such  supply  they  can  provide  them  by 
themselves  drawing  a  bill  of  exchange  on  their  correspond- 
ents. It  is  seldom  that  an  important  bank  cannot  provide 
a  remittance  upon  any  center  of  commerce  whatsoever. 

Bills  which  they  supply  carry  the  bank's  endorsement 
and  by  that  fact  alone  acquire  great  security.  Thanks  to 
this  security,  the  banks  may  put  in  circulation  a  portion  of 
the  bills  they  have  discounted.  And  paper,  thus  strength- 
ened by  their  endorsement,  is  accepted  about  as  readily  as 
money  itself.  This  function  of  the  bank  has  been  com- 
pared to  insurance.  In  fact  the  bank,  by  lending  its  own 
credit  in  this  manner,  does  guarantee  the  paper  and  insure 
successive  endorsers  and  possessors  of  it  against  loss. 

7.  Discounting  paper  constitutes  one  of  the  best  op- 
erations for  the  bank  since  credits  of  this  nature  are  gen- 
erally good,  are  short  and  frequently  renewed. 

The  same  may  be  said  of  dealings  in  exchange  which 
consists  in  giving  out  bills  in  exchange  for  money  or 
money  for  bills  from  one  country  to  another. 

8.  But  a  bank  may  not  always  succeed  in  using  all  its 
money  in  discounts  and  exchange.  It  strives  to  prevent 
its  funds  lying  idle,  and  accordingly  resorts  to  operations 
of  various  kinds,  such  as  advances  to  commerce  in  the 
form  of  direct  loans  or  loans  on  security,  or  extending  a 
credit  by  opening  an  account.  It  may  make  long  term 
loans  under  limited  liability,  underwrite  the  securities  of  a 
new  enterprise,  or  lend  money  on  mortgage. 

The  development  of  stock  companies  of  all  kinds,  in- 
dustrial and  quasi-public  enterprises,  as  well  as  municipal 
and  government  debts  has  given  a  special  stimulus  to  un- 


224  Elements  of  Political  Economy 

derwriting,  which  consists  in  agreeing  to  provide  the 
money  for  a  new  enterprise  or  pubHc  loan  and  take  over 
the  securities  with  a  view  to  their  being  sold  later  on. 
This  is  done  in  America  by  private  bankers,  and  by  a 
special  class  of  banks  known  as  trust  companies  (finan- 
cial). 

Such  operations  are  not  free  from  risk.  However  se- 
cure the  mortgage  loans  or  other  long  term  loans,  they 
present  the  inconvenience  of  tying  up  capital,  of  curtailing 
therefore  the  number  of  operations  and  of  exposing  the 
bank  to  the  danger  of  being  unable  to  respond  promptly 
to  unusual  demands  which  a  financial  disturbance  may  lead 
its  depositors  to  make  upon  it. 

Investment  in  stocks  and  speculations  for  a  rise  or  fall 
of  values  is  still  more  dangerous  for  banks.  However  ad- 
vantageous discounts  may  be,  they  also  may  involve  loss. 
Persons  may  give  a  note  without  having  assets  which 
would  justify  it;  and  by  getting  a  new  discount  at  matu- 
rity of  the  old,  in  reality  pay  the  bank  with  its  own  credit. 
Once  launched  in  such  transactions,  a  bank,  which  may 
feel  forced  to  renew  loans  in  order  to  avoid  losing  the 
money  already  advanced,  may  end  by  finding  a  large  part 
of  its  discounts  fictitious;  this  is  the  direct  road  to  bank- 
ruptcy. The  art  of  the  banker  consists  in  avoiding  such 
consequences  and  in  regulating  his  discounts  and  loans 
so  as  to  conform  to  the  volume  and  continuance  of  his 
deposits. 

89.  Bank  Bills. — For  the  completion  of  the  mechan- 
ism of  banks  there  remains  but  one  device,  namely,  bank 
bills,  the  emission  of  which,  regulated  by  law  in  most 
countries,  characterizes  what  we  term  banks  of  issue. 

When  a  note  is  presented  for  discount  at  the  ordinary 
bank,  the  latter  pays  out  specie  or  currency  which  circu- 


The  Circulation  of  Wealth  225 

lates  in  the  country  in  question,  and  which  it  has  itself 
previously  received  as  cash.  On  the  other  hand,  when 
such  note  is  presented  for  discount  at  a  bank  of  issue,  the 
latter  pays  out  its  own  bank  bills,  i.  e.,  fiduciary  money 
which  the  bank  itself  has  issued.  It  does  not  exchange  a 
real  value  for  a  promise,  but  gives  for  the  promise  simply 
a  different  promise.  One  can  no  longer  say  exactly  that 
it  makes  an  advance  of  capital  to  him  who  presents  the 
note.  It  simply  lends  him  its  credit,  which  it  substitutes, 
as  it  were,  for  his,  since  it  gives  him  the  means  of  procur- 
ing credit  immediately,  not  in  his  own  private  name,  but 
in  the  name  of  the  bank. 

There  is  a  great  difference  between  commercial  paper 
and  a  bank-note;  the  public  knows  this  difference  very 
well. 

The  former  is  payable  only  at  maturity,  more  or  less 
distant;  it  can  be  circulated  only  by  endorsement.  It  is 
signed  by  a  person  of  whom  most  of  the  people  to  whom 
one  would  offer  it  have  never  heard,  and  though  the  pres- 
ent bearer  knows  the  last  endorser,  whose  guarantee  per- 
haps satisfies  him,  he  can  only  force  payment  from  him 
by  formally  protesting  the  note.  Accordingly  commercial 
paper  cannot  circulate  as  freely  as  money. 

It  is  quite  otherwise  with  banknotes.  They  are  pay- 
able at  sight  and  to  bearer.  One  may  therefore  present 
them  at  any  moment  for  payment  and  the  bank  is  obliged 
to  redeem  them  immediately  in  lawful  money.  Xhey  pass 
freely  without  signature  or  endorsement.  Whosoever 
possesses  them  has  the  right  to  present  them  for  payment. 
The  very  facility  of  circulation  that  renders  commercial 
paper  which  is  payable  to  bearer  impracticable,  makes  the 
fortune  of  banknotes  made  payable  to  bearer.  The  former 
are  refused  because  after  they  shajl  have  passed  through 

15 


226  Elements  of  Political  Economy 

the  hands  of  two  or  three  persons,  there  is  complete  ig- 
norance of  the  financial  standing  or  responsibility  of  the 
person  who  signed  them.  But  everybody  knows  the  bank 
and  reposes  confidence  in  it;  its  single  signature  is  worth 
more  than  the  signatures  of  twenty  private  endorsers.  Its 
bills  are  accepted  as  freely  as  money.  Again,  he  who  has 
paid  his  debt  with  a  piece  of  commercial  paper  which  he 
has  endorsed  may  be  called  upon  to  pay  the  note  if  pro- 
tested, and  this  liability  continues  until  the  note  matures. 
He  who  has  paid  his  debt  with  banknotes  is  free.  Bank- 
notes, like  other  paper  money,  may  be  counted  rapidly,  and 
carried  and  transported  easily  in  large  sums.  These  ad- 
vantages often  cause  them  to  be  preferred  to  specie. 

In  principle  the  banknote  does  not  differ  from  com- 
mercial paper.  In  practice,  it  performs  the  function  of 
money,  and  often  displaces  metallic  money.  It  may  or 
may  not  have  the  quality  of  legal  tender.  In  the  latter 
case  everybody  is  free  to  accept  or  reject  it  when  tendered. 
But  when  the  law  authorizes  the  debtor  to  make  his  pay- 
ments in  it,  as  is  the  case  with  notes  of  the  national  banks 
in  the  United  States,  it  becomes  true  fiduciary  money. 

The  public  benefits  by  the  use  of  banknotes  because  of 
their  convenience ;  the  bank  benefits  because  to  the  ordinary 
profits  of  discounts  it  adds  the  advantage  of  paying  out 
money  which  practically  costs  it  nothing.  Nevertheless, 
despite  the  useful  place  it  occupies  in  circulation,  we  must 
not  forget  that  the  banknote  is,  after  all,  only  a  promise  to 
pay. 

90.  Reserve,  Discounts  and  Circulation. — May  a 
bank  of  issue  safely  regard  its  power  of  issuing  notes  as  an 
inexhaustible  fund  and  open  its  window  to  discounts  with- 
out limit?  Certainly  not.  It  ought  not,  and,  in  fact,  can- 
not.    Like  other  banks,  though  in  a  different  manner,  its 


The  Circulation  of  Wealth  227 

operations  must  depend  upon  its  metallic  reserve.  To 
simplify  the  matter,  let  us  suppose  an  institution  to  have  no 
deposits  and  to  issue  no  notes,  but  to  confine  itself  simply 
to  discounts.  If  it  starts  with  twelve  million  dollars  in 
specie,  and  if  the  average  maturity  of  the  notes  which  are 
offered  for  discount  are  sixty  days,  it  cannot  discount 
more  than  two  hundred  thousand  per  day,  as  this  would 
exactly  exhaust  twelve  million  in  sixty  days.  Now  add  to 
this  single  office  the  function  of  issuing  banknotes.  The 
bank  may  now  expand  its  discounts,  but  here,  too,  there  is 
a  limit.  Suppose  experience  has  shown  it  that  it  cannot 
issue,  say  thirty-six  million,  without  having  a  third  of  the 
issue  presented  for  redemption,  i.  e.,  that  it  cannot  keep  in 
circulation  more  than  twenty-four  million.  Add  the 
twelve  million  specie  with  which  it  started  and  we  have  a 
total  of  thirty-six  million  available  for  discounts,  or  a 
limit  of  six  hundred  thousand  per  day  for  sixty  days. 

An  ordinary  bank  may  cease  discounting  when  it  per- 
ceives that  its  reserve  is  exhausted ;  a  bank  of  issue  which 
ceased  to  discount  only  at  such  a  signal  would  be  bankrupt, 
because  it  could  not  redeem  its  notes. 

The  circulation  of  the  bank  is  the  amount  of  banknotes 
it  has  out,  its  reserve  is  the  specie  in  money  and  ingots  it 
has  in  its  vaults,  its  discounts  the  sum  of  the  paper  dis- 
counted by  it.  It  would  seem  that  a  fixed  relation  existed 
between  these  three  terms,  because  banknotes  go  out  only 
when  commercial  paper  enters,  and  because  the  reserve  is 
enlarged  principally  by  the  payment  of  this  paper  at  matu- 
rity, and  diminishes  by  the  re-entrance  of  the  banknotes 
into  circulation.     This  is,  however,  not  the  case. 

I.  First  supposition:  the  bank  discounts  two  hun- 
dred thousand  of  paper  per  day,  all  at  thirty  days.  It  has 
thus  continually  in  its  portfolio  six  million.     Is  that  a  rea- 


228  Elements  of  Political  Economy 

son  why  the  circulation  of  the  bank's  notes  should  remain 
fixed  at  a  like  figure?     No.     The  first  six  million  paper 
was  discounted  with  the  banknotes,  but  when  the  bank  col- 
lected this  sum  at  maturity  of  the  discounts,  the  debtors 
may  have  made  their  payments  largely  in  specie,  and  of  the 
six  million  banknotes  issued  perhaps  but  one  million  have 
in  this  way  come  back  to  the  bank.     At  the  end  of  another 
thirty  days  the  bank  has  given  six  million  more  notes  in 
exchange  for  discounts.     If  payment  of  these  discounts  at 
maturity  should  bring  back  again  but  one  million  notes,  the 
bank  would  have  in  circulation  ten  million.     A  month 
later,  under  the  same  conditions,  the  circulation  will  have 
increased  to  fifteen  million,  which,  together  with  the  six 
million  addition  given  out  in  discounting  paper  for  the 
current  month,   will  make  twenty-one  million.     In   this 
case  it  has  not  been  the  discounts,  but  principally  the  re- 
serve, which  has  responded  to  the  circulation.     In  reality, 
if  at  each  of  the  three  periods  of  maturity  there  has  come 
back  only  one  million  notes,  it  is  because  the  remaining 
fifteen  million  paid  into  the  bank  has  been  in  specie,  which, 
with  the  six  million  commercial  paper  held  in  the  form  of 
discounts,  represents  the  total  value  of  twenty-one  million 
notes  in  circulation. 

2.  The  movement  may  be  an  opposite  one.  Take  the 
bank  at  the  moment  when  its  circulation  is  twenty-one 
million,  its  discounts  six  and  its  specie  reserve  fifteen. 
Suppose  now  that  at  maturity  of  the  discounts  all  pay- 
ments are  made  in  banknotes ;  the  circulation  is  reduced  by 
six  million.  The  bank,  it  is  true,  reissues  this  six  million 
in  exchange  for  discounts  the  following  month,  but  as 
soon  as  each  client  whose  paper  is  discounted  has  received 
the  banknotes  he  passes  to  another  window  and  changes 
them  for  specie ;  you  have  here  a  reduction  of  six  million 


The  Circulation  of  Wealth  229 

in  the  circulation  and  in  the  cash  reserve.  At  maturity  all 
receipts  are  again  in  banknotes,  which  once  more  the  bank 
tries  in  vain  to  put  back  into  circulation  by  paying  them 
out  in  exchange  for  discounts  the  following  month.  But 
it  pays  out  only  six  million  banknotes  and  receives  twelve. 
Every  note  which  it  discounts  and  later  collects  causes 
double  the  amount  of  banknotes  to  come  back  into  the 
bank;  the  specie  reserve  supplies  the  difference.  Every 
thirty  days  the  specie  reserve  and  the  circulation  thus  di- 
minish by  six  million.  At  the  end  of  three  months  the 
discounts  remaining  at  the  same  figure,  six  million,  the 
reserve  is  but  three  million,  and  the  circulation  nine. 

If  the  bank  is  so  imprudent  as  to  continue  its  operations 
it  ends  in  bankruptcy,  i.  e.,  it  can  no  longer  redeem  its 
notes  at  sight,  because  its  holdings  consist  of  paper  which 
can  be  turned  into  cash  only  at  maturity,  whilst  the  de- 
mand for  money  in  exchange  for  banknotes  is  immediate. 

The  danger  of  a  circulation  out  of  proportion  to  the 
specie  reserve  is  all  the  greater  from  the  fact  that  when 
the  depletion  of  the  reserve  becomes  apparent,  panic  en- 
sues and  the  holders  of  the  banknotes  crowd  to  the  bank 
to  have  them  redeemed. 

3.  Each  country  needs  but  a  certain  quantity  of 
money  proportioned  to  the  importance  of  its  productions 
and  its  commercial  wages.  If  too  much  is  supplied  that 
portion  which  is  forced  circulation  depreciates  and  the 
good  money  leaves  the  country. 

Now,  as  banknotes  cannot  be  exported,  it  follows  that 
when  there  is  an  excessive  issue  they  are  presented  for  re- 
demption and  the  specie  thus  secured  is  exported.  The 
bank  must  study  the  situation  and  endeavor  to  keep  its 
issues  within  a  proper  limit.  If  it  surpasses  such  limit  it 
is  sure  to  be  brought  back  to  it. 


230  Elements  of  Political  Economy 

Let  us  take  the  figure  of  twenty-one  millions  as  the 
extreme  limit  of  circulation  for  a  given  country  and  take 
the  moment  when  the  bank  has  that  sum  of  banknotes  out, 
represented  by  six  millions  discounts  and  fifteen  millions 
specie  reserve.  What  will  it  do  the  following  month? 
Discount  in  specie.  The  six  millions  specie  which  it  pays 
out  will  then  re-enter  its  vaults  at  the  end  of  the  month, 
and  the  balance  will  be  maintained. 

4.  Another  supposition.  The  bank  may  increase  its 
profits  by  allowing  none  of  its  capital  to  be  idle,  and  to  this 
end  it  may  increase  its  discounts.  It  discounts  twelve  or 
eighteen  millions  per  month,  and  proportionally  to  the 
growth  of  its  discounts,  its  reserve  diminishes.  The 
money  paid  out  is  partly  exported  in  payment  of  merchan- 
dise imported.  The  bank  thus  finds  itself  with  a  circula- 
tion of  twenty-one  millions,  discounts  of  sixteen  millions 
and  a  specie  reserve  of  five  millions.  The  equilibrium  still 
exists,  but  in  this  case  the  commercial  paper  is  become  the 
principal  guarantee  of  the  banknotes.  This  is  undoubt- 
edly the  most  advantageous  condition  for  the  bank,  that 
in  which  it  renders  the  greatest  service  to  commerce  and 
at  the  same  time  realizes  the  greatest  profits  for  itself.  But 
it  must  stop  this  expansion  of  its  credits  soon  enough  not 
to  endanger  the  redemption  of  its  notes  by  the  exhaustion 
of  its  reserve. 

Such  are  the  operations  of  a  bank  of  issue  disconnected 
from  the  complexity  introduced  by  its  deposits  and  other 
features  of  its  business.  As  a  rule,  when  the  reserve  and 
circulation  grow,  it  indicates  a  condition  of  public  confi- 
dence ;  when  the  reserve  and  circulation  both  diminish,  it 
indicates  a  lack  of  confidence;  while  when  the  discounts 
grow  and  become  the  principal  guarantee  of  the  circula- 
tion, it  betokens  commercial  activity.     In  a  country  where. 


The  Circulation  of  Wealth  231 

as  in  France,  there  is  but  a  single  bank  of  issue,  the  reserve, 
circulation  and  discounts  may  be  consulted  as  an  indicator 
of  the  condition  of  commerce. 

91.  Paper  Money.  One  of  the  two  essential  qualities 
of  a  banknote  is  that  it  should  be  redeemable  at  sight  in 
lawful  money.  This  conviction,  which  every  bearer  of  the 
note  has,  of  being  able  at  his  pleasure  to  convert  this 
promise  of  the  bank  into  real  money  gives  to  it  a  character 
which  permits  it  to  circulate  as  freely  as  money  and  side 
by  side,  and  at  parity,  with  money.  Fail  to  so  redeem  it 
and  confidence  in  it  ceases.  The  banknote  is  then  nothing 
other  than  a  note  which  has  not  been  honored  at  maturity. 
In  such  event  it  may  have  a  price  varying  with  the  proba- 
bility of  its  being  eventually  redeemed. 

If  the  state  gives  to  a  note,  not  redeemable  at  sight, 
a  legal  tender  quality,  i.  e.,  institutes  a  forced  circulation, 
such  note,  whether  issued  by  a  bank  or  by  the  government 
itself,  is  Hat  money. 

There  is  a  profound  difference  between  a  banknote 
proper  and  fiat  money.  The  former,  whether  possessing 
legal  tender  quality  or  not,  is  always  and  immediately  re- 
deemable at  sight  in  specie,  whilst  the  latter,  though  a  legal 
tender,  is  not  redeemable.  The  consequences  are  quite 
different.  The  one,  if  restrained  within  its  proper  limits, 
is  without  danger,  and  the  very  fact  that  it  circulates  indi- 
cates that  it  performs  a  service :  the  other  cannot  circulate 
without  raising  a  certain  prejudice  against  the  nation 
which  resorts  to  it. 

And  for  this  reason.  As  provision  is  lacking  for  re- 
deeming the  notes  at  sight,  which  provision  regulates  the 
amount  of  the  circulation,  it  is  difficult  to  determine  the 
moment  when  there  is  an  excess  of  notes,  and  when  they 
commence  to  have  an  exchange  value  less  than  their  nomi- 


232  Elements  of  Political  Economy 

nal  value,  i.  c,  less  than  specie.  Now  that  moment  is  co- 
incident generally  with  the  first  issue  of  such  fiat  money. 
Specie  will  serve  to  make  all  purchases  which  paper  money 
can  make;  moreover  it  is  accepted  within  the  country  by 
the  most  cautious  (that  which  cannot  be  said  of  fiat 
money),  and  is  received  everywhere  abroad  (fiat  money  is 
not).  Can  parity  of  value  exist  between  things  so  differ- 
ent? 

Payments  abroad  are  accordingly  made  in  specie ;  first 
point.  To  restore  the  home  circulation  which  has  been 
depleted  by  such  exportation  of  specie  and  by  the  very  de- 
preciation of  the  fiat  money,  fresh  issues  are  resorted  to ; 
for  there  is  little  chance  of  the  precious  metals  being  im- 
ported into  a  country  which  cannot  keep  them;  second 
point. 

Successive  emissions  of  fiat  money  hasten  its  deprecia- 
tion and  increase  the  disparity  between  it  and  metallic 
money,  forcing  the  latter  the  more  rapidly  out  of  the 
country.  Fiat  money  accordingly  expels  specie  and  re- 
duces the  nation  which  uses  it  to  content  itself  principally 
with  paper  money  and  with  subsidiary  coin  which  has  a  real 
value  inferior  to  its  nominal  value ;  in  other  words,  to  have 
as  a  common  measure  of  values  simply  a  fluctuating  token, 
and  not  a  real  equivalent  of  value,  i.  c,  to  have  no  true 
money.  Now  when  a  token  represents  something  which 
is  not  at  hand,  and  when  measures  cannot  be  constantly 
verified  by  a  standard,  tokens  and  measures  no  longer  offer 
anything  definite  to  the  mind.  In  some  way  they  con- 
stantly shrink  without  one  being  able  to  determine  what 
they  really  were  formerly. 

Home  commerce  is  disturbed  and  in  foreign  commerce 
the  merchants  of  the  country  in  question  are  at  a  disad- 
vantage as  against  foreign  merchants,  for  the  reason  that 


The  Circulation  of  Wealth  233 

the  home  merchants  make  their  foreign  payments  in  the 
precious  metals,  which  are  at  a  premium,  and  are  them- 
selves paid  in  paper  money,  which  is  at  a  discount.  Sup- 
pose a  merchant  to  have  imported  goods  worth  $1,000 
which  he  resells,  nominally  at  10%  advance,  for  $1,100, 
being  given  ninety  days  in  which  to  pay,  and  granting  a 
like  credit  to  his  customers.  At  the  end  of  the  ninety  days 
$1,100  are  paid  to  him  in  paper  money;  but  when  he  ap- 
plies to  the  bank  for  $1,000  gold  to  ship  to  his  foreign 
creditor  he  finds  that  the  paper  money  has  depreciated 
10%,  i.  e.,  that  his  $1,100  are  worth  only  $990  in  gold. 

The  emission  of  fiat  money  is  a  kind  of  forced  loan  to 
which  a  state  may  be  obliged  to  resort  in  times  of  extreme 
distress ;  necessity  is  then  the  excuse  for  it.  The  loss  re- 
sulting from  the  introduction  of  fiat  money  in  the  circula- 
tion varies  according  to  the  degree  of  credit  which  the  state 
enjoys.  But  there  is  nearly  always  a  loss ;  a  direct  loss  in 
exchange  and  foreign  commerce,  an  indirect  loss  through 
the  disturbance  of  the  circulation  at  home. 

A  state  which  contracts  a  loan  in  order  to  redeem  its 
fiat  money,  as  a  rule,  performs  a  profitable  and  a  wise 
transaction. 

92.  The  Emission  of  Banknotes.  The  serious  conse- 
quences for  the  circulation  and  national  wealth  which  fol- 
low a  failure  to  redeem  banknotes  at  sight  is  the  principal 
reason  why  most  governments  supervise  the  emission  of 
such  notes.  Banknotes  may  be  issued  under  four  differ- 
ent systems,  viz. :  Absolute  freedom  of  emission,  general 
emission  under  restrictions,  privileged  emissions  and  sole 
emission. 

Absolute  freedom  of  emission  conforms  to  the  theory 
of  some  economists  who  see  in  the  banknote  simply  a  bit 
of  commercial  paper  analogous  to  other  kinds  of  commer- 


234  Elements  of  Political  Economy 

cial  paper,  and  who  pay  no  attention  to  its  quality  as  an 
instrument  of  circulation  performing  the  function  of 
money.  According  to  this  theory,  the  emission  of  bank- 
notes is  classed  among  the  ordinary  acts  of  commerce, 
which,  following  the  principle  of  non-interference,  should 
be  free.  This  theory  is  not  practiced  in  any  of  the  large 
states  which  have  an  important  commerce. 

General  emission  under  restrictions  is  the  system  under 
which  any  bank  may  at  its  risk  and  peril,  as  at  the  risk 
and  peril  of  those  who  accept  them,  issue  notes  payable  at 
sight  and  to  bearer,  quite  as  freely  as  notes  of  other  kinds, 
subject  to  certain  general  conditions  fixed  by  law,  such  as 
a  maximum  of  emission,  the  maintenance  of  a  fixed  pro- 
portion between  the  circulation  and  the  specie  reserve,  a 
deposit  of  securities  representing  part  of  the  capital,  etc. 

Privileged  emission  is  a  system  under  which  the  right 
of  emitting  banknotes  is  conferred  only  on  a  restricted 
number  of  banks  which  therefore  enjoy  a  monopoly.  The 
amount  of  issues  and  the  conditions  to  which  they  must 
conform  are  fixed  by  law. 

Sole  emission  is  the  system  under  which  the  state  it- 
self emits  bills  through  the  instrumentality  of  a  public 
bank,  or  confers  the  privilege  upon  a  single  bank,  which 
may  be  a  private  establishment,  but  which  must  provide 
certain  guarantees  stipulated  in  its  charter. 

Under  the  last  two  systems  the  ordinary  banks  of  the 
country  may  borrow,  lend,  discount,  receive  deposits,  and, 
like  other  business  houses,  undertake  any  operations  they 
choose,  except  one :  the  emission  of  notes  payable  at  sight 
and  to  bearer.  Now,  non-interference  with  the  ordinary 
business  of  banks  and  the  regulation  of  emissions  are  two 
things  quite  distinct  in  principle  and  reconcilable  in  prac- 
tice.    Theoretically,  such  regulation  is  within  the  rights  of 


The  Circulation  of  Wealth  235 

the  state  because  the  state,  in  the  general  interest,  is 
charged  zvith  the  duty  of  protecting  the  soundness  and 
genuineness  of  money,  which  is  the  indispensable  agent 
in  the  circulation  of  values,  just  as  it  must  police  the  roads 
which  are  channels  for  the  circulation  of  goods.  Prac- 
tically, each  of  these  systems  may  pride  itself  upon  certain 
advantages.  With  or  without  regulation,  freedom  of 
emissions  conduces  to  a  multiplicity  of  banks,  to  which 
it  ofifers  the  inducement  of  the  profits  to  be  derived  from 
the  issue  of  banknotes,  and  a  multiplicity  of  banks  in  its 
turn  favors  the  diffusion  of  credit  through  all  the  many 
branches  of  commerce  and  industry. 

The  system  of  the  sole  emission,  when  the  transac- 
tions of  the  bank  are  broad  and  general,  favors  the  circu- 
lation of  representative  money,  because  the  issues  are  uni- 
form and  their  soundness  recognized  everywhere.  In 
this  respect  it  is  to  be  preferred  to  the  former. 

93.  American  and  Leading  European  Banking  Sys- 
tems.— Under  the  national  banking  system  of  the  United 
States  of  America,  the  notes  issued  by  the  banks  are  se- 
cured by  a  deposit  of  government  bonds  at  the  Federal 
treasury  so  that  the  promise  of  the  bank  is  fortified  by  the 
promise  of  the  government.  If  the  bank  fails,  the  gov- 
ernment sells  the  bonds  and  pays  the  holders  of  the  bank- 
notes out  of  the  proceeds.  Whether  the  note  is  promptly 
redeemed,  therefore,  depends  in  the  last  resort  upon  the 
value  of  the  government  bonds,  or  in  other  words,  upon 
government  credit.  This  is  a  system  of  general  emission 
under  restrictions. 

The  national  banks  are  required  to  keep  a  reserve  in 
lawful  money  ranging  from  15  to  25  per  cent,  of  their 
deposits,  and  to  redeem  their  notes  at  sight.     Side  by  side 


236  Elements  of  Political  Economy 

with  the  national  banknotes,  three  other  forms  of  repre- 
sentative money  circulate  in  the  United  States,  viz  : 

a.  Greenbacks,  or  treasury  notes,  which  are  paper 
money  issued  directly  by  the  government  and  based  solely 
upon  government  credit. 

b.  Silver  certificates,  which  represent  silver  in  coin 
or  bullion  in  the  vaults  of  the  government,  but  not  to  the 
full  value  of  the  note. 

c.  Gold  certificates  which  are  based  dollar  for  dollar 
on  deposits  of  gold  at  the  United  States  Treasury,  and 
are,  therefore,  the  only  form  of  representative  money  in 
the  United  States  which  would  weather  all  political  storms 
and  impairment  of  government  credit  without  itself  suf- 
fering a  fall  in  value. 

Gold  is  at  present  the  standard  of  value  among  civil- 
ized nations  and  is  accordingly  desirable  as  the  basis  of 
credit  for  every  country.  The  only  way  to  attract  and 
keep  gold  within  a  given  country  is  to  make  it  wanted  by 
having  a  place  for  it  in  the  currency  system  of  the  country. 
As  notes  are  more  convenient  than  specie  for  the  mass  of 
transactions  it  follows  that  representative  money  based 
dollar  for  dollar  on  gold,  either  in  the  vaults  of  the  gov- 
ernment or  of  banks,  is  one  of  the  most  desirable  forms  of 
money  a  people  can  adopt. 

The  English  system  is  a  system  of  privileged  emission 
but  notes  are  issued  principally  by  one  institution,  the 
Bank  of  England.  Issues  of  the  Bank  of  England,  with 
certain  exceptions,  are  based  pound  for  pound  upon  a  re- 
serve of  gold.  A  notable  exception  is  an  issue  of  16  mil- 
lion pounds  sterling  based  upon  a  debt  of  the  government 
to  the  bank.  Furthermore  a  few  other  banks  still  enjoy 
an  old  privilege  of  issuing  a  limited  amount  of  notes  based 
upon  assets,  and  whenever  these  banks  for  any  reason 


The  Circulation  of  Wealth  237 

whatsoever  go  out  of  existence  the  Bank  of  England  as 
heir  to  this  privilege  may  add  such  amount  to  its  unse- 
cured issues.  These  unsecured  issues  of  all  the  privileged 
banks,  including  the  Bank  of  England,  together  consti- 
tute so  small  a  portion  of  the  total  issues  that  the  bank- 
notes of  Great  Britain  may  be  said  to  repose  practically 
upon  a  full  reserve  of  gold. 

In  certain  crises  the  limit  of  16  million  pounds  sterling 
placed  upon  issues  not  covered  by  gold,  i.  e.,  secured  by 
government  bonds,  has  proven  a  hardship,  and  in  such 
emergencies  the  government  has  come  to  the  relief  of  the 
bank  by  temporarily  increasing  this  amount,  thereby  vir- 
tually suspending  the  bank  act.  Such  action  does  not 
amount  to  a  suspension  of  specie  payment  for  the  reason 
that  it  does  not  relieve  the  bank  of  the  necessity  of  redeem- 
ing its  notes  in  gold  on  demand.  This  limited  issue  of 
Bank  of  England  notes  based  upon  government  credit  may 
be  compared  to  the  issues  of  the  national  banknotes  in  the 
United  States,  as  these  are  similarly  based. 

The  system  in  use  in  France  is  the  sole  emission.  It  is 
more  complicated  and  must  therefore  be  described  more  at 
length.  To  the  Bank  of  France  has  been  given  the  ex- 
clusive privilege  of  issuing  banknotes  in  France.  Its  cap- 
ital is  fixed  by  law  and  the  bank  is  obliged  to  maintain  a 
branch  in  each  of  the  departments  of  France.  The  pres- 
ent charter  of  the  bank,  which  expires  in  1926,  permits 
the  bank  to  issue  notes  up  to  5,000  million  francs,  but  the 
advisability  of  a  smaller  issue  may  be  dictated  by  its  own 
prudence  and  by  the  necessity  of  redeeming  the  notes  at 
sight  in  specie.  As  the  leading  officers  of  the  bank  are 
named  by  the  government,  the  latter,  moreover,  retains  a 
substantial  control  over  the  affairs  of  the  bank.  In  prac- 
tice its  issues  do  not  greatly  exceed  its  metallic  reserve ;  at 


238  Elements  of  Political  Economy 

times,  though  very  rarely,  they  are  even  inferior  to  it,  the 
notes  simply  taking  the  place  of  specie  in  the  circulation  of 
the  country  without  making  any  addition  to  that  circula- 
tion; the  convenience  of  the  banknotes  causes  them  to  be 
preferred.  In  political  crises  the  government  has  found 
it  necessary  to  relieve  the  bank  of  the  obligation  to  redeem 
its  notes  at  sight  whilst  making  them  legal  tender,  i.  e.,  to 
inaugurate  forced  circulation.  This  is  what  happened 
during  the  revolution  of  1848;  but  such  was  the  confi- 
dence in  the  bank  that  notes  fell  in  value  less  than  one- 
fifth  of  one  per  cent.  On  the  second  occasion  of  suspen- 
sion of  specie  payment,  1870- 1878,  the  fall  was  even 
less.  The  principal  operations  of  the  Bank  of  France  are 
discounts,  collections,  current  accounts,  dealings  in  specie 
and  in  public  obligations,  and  loans  to  the  public  treasury. 
The  commercial  paper  which  it  discounts  must  mature  in 
not  more  than  ninety  days,  and  must  bear  not  less  than 
three  signatures,  it  being  allowed  to  substitute  for  the 
third  signature  a  deposit  of  securities,  either  those  of  the 
government  or  of  the  city  of  Paris,  or  railroad  shares,  or 
shares  of  the  bank  itself.  The  committee  of  discount  does 
not  know  the  innumerable  signatures  of  the  notes  it  re- 
ceives; it  does  know,  however,  the  bankers  from  whom  it 
has  received  them  and  who  deal  directly  with  the  mer- 
chants, discounting  their  paper  of  two  signatures,  and 
after  endorsing  it  themselves,  rediscounting  it  at  the  Bank 
of  France  in  order  to  liberate  their  capital.  The  Bank  of 
France  does  not  allow  interest  on  deposits. 

In  the  German  Empire,  as  in  Great  Britain,  we  find  the 
bulk  of  the  banknotes  issued  by  one  bank.  A  few  other 
banks  issue  banknotes,  but  the  total  of  all  such  issues  is 
insignificant  in  comparison  with  the  issues  of  the  Reichs- 
bank,    or    Imperial   Bank   of   Germany.     Each   bank   is 


The  Circulation  of  Wealth  239 

obliged  to  redeem  its  notes  at  sight,  and  the  notes  are  not 
legal  tender ;  i.  e.,  no  one  is  forced  to  accept  them  in  pay- 
ment of  a  debt.  The  Reichsbank  operates  under  a  special 
charter  granted  for  a  term  of  years.  In  no  case  can  its 
issues  exceed  three  times  the  bank  reserve,  which  reserve 
must  be  made  up  of  legal  tender,  consisting  of  imperial 
treasury  notes  and  domestic  or  foreign  specie.  In  order 
to  provide  an  element  of  elasticity  in  the  currency  of  the 
empire,  the  bank  is  subject  to  a  tax  of  5%  on  all  issues 
above  a  certain  limit,  which  limit  is  fixed  at  present  at 
450  million  marks  in  excess  of  the  cash  reserve  of  the 
bank.  This  element  of  elasticity  is  one  of  the  important 
features  of  the  German  system.  In  times  of  financial 
stress  the  bank  finds  it  expedient  or  profitable  to  pay  the 
tax  of  5  %  and  thus  exercise  the  privilege  of  issuing  notes 
in  excess  of  the  ordinary  requirements  of  the  country. 
The  moment  conditions  become  easier  the  burden  of  this 
tax  makes  such  excess  issues  unprofitable,  and  we  thus 
have  an  automatic  contraction  of  the  currency.  All  issues 
of  banknotes  in  excess  of  the  actual  cash  reserve  must  be 
covered  by  discounts  bearing  at  least  two  signatures  and 
maturing  in  not  more  than  three  months.  From  time  to 
time  the  other  banks  find  it  expedient  to  surrender  the 
privilege  of  issuing  banknotes,  and  the  privilege  they  sur- 
render is  then  transferred  to  the  imperial  bank,  serving  to 
swell  the  volume  of  its  tax-free  issues.  Of  the  thirty- 
three  banks  which  enjoyed  the  privilege  of  issuing  notes 
when  the  Reichsbank  was  founded  in  1875  only  some  half 
dozen  retain  this  privilege  to-day.  The  capital  of  the 
imperial  bank  is  private  capital.  But  its  management  is 
in  the  hands  of  imperial  officials  and  the  state  shares  in 
the  profits  of  the  bank.  The  demand  from  certain  quar- 
ters that  the  state  take  over  the  bank  completely  so  as  to 


240  Elements  of  Political  Economy 

monopolize  its  profits  has  been  resisted  on  the  grounds 
that  the  voice  which  the  shareholders  have  in  the  manage- 
ment prevents  the  extension  of  credit  to  persons  unworthy 
of  credit,  as  well  as  giving  to  the  bank  the  benefit  of  busi- 
ness experience  and  enterprise.  The  Reichsbank  has  sev- 
eral hundred  branches  throughout  Germany.  A  system 
of  transfers  amongst  these  various  branches,  known  as 
"giro  transfers,"  under  which  a  payment  made  at  one 
branch  is  credited  at  another,  is  a  substitute  for  the  use  of 
drafts  in  other  countries. 

The  Reischsbank  is  obliged  to  purchase,  at  the  price  of 
1,392  marks  per  pound,  all  gold  offered  to  it.  It  can  like- 
wise encourage  in  various  ways  the  importation  of  gold, 
and  it  has  greatly  helped  the  substitution  of  gold  for  silver 
as  the  substantial  basis  of  German  currency.  The  note- 
issuing  banks  are  bound  by  the  rate  of  discount  of  the 
Imperial  Bank  when  such  rate  is  4%  or  over. 

The  Imperial  treasury  likewise  issues  notes  against  the 
metallic  reserve  in  the  war  chest,  the  amount  outstanding 
varying  with  this  reserve. 

The  privilege  enjoyed  by  the  Reichsbank  in  common 
with  the  Bank  of  France  of  issuing  banknotes  against 
its  discounts  or  commercial  paper  is  perhaps  a  less  danger- 
ous privilege  when  thus  conferred  upon  only  one  institu- 
tion in  the  country  than  it  would  be  if  a  similar  privilege 
were  extended  for  example  to  the  national  banks  in  the 
United  States.  In  the  latter  event  the  safety  of  an  im- 
portant element  of  the  national  currency  would  depend 
upon  the  watchfulness  of  the  government  in  dealing  with 
several  thousand  institutions  instead  of  one.  To  provide 
for  a  joint  responsibility  of  all  the  national  banks  in  the 
United  States  with  respect  to  their  issues  could  serve  only 


The  Circulation  of  Wealth  241 

to  shift  the  danger  from  individual  over-issues  to  a  general 
over-issue,  which  would  mean  inflation. 

Resume 

Credit  consists  in  the  exchange  of  a  present  reality 
against  a  future  probability.  It  is  an  advance  of  services. 
Credit  in  itself  is  a  transfer  of  capital,  and  does  not  create 
capital. 

Credit,  whether  an  advance  of  services  under  the  form 
of  labor  or  things  previously  produced  by  labor,  is  deter- 
mined by  confidence.  It  conduces  to  a  more  rapid  circu- 
lation, and  therefore  to  an  increase  of  wealth. 

We  may  distinguish  between  simple  credit,  such  as 
personal  loans  on  collateral ;  real  credits,  such  as  mort- 
gage loans ;  and  commercial  credit,  which  is  mixed.  The 
principal  kinds  of  commercial  paper  are  the  simple  note, 
the  note  payable  to  order,  and  the  draft. 

To  give  money  in  exchange  for  a  note  is  to  lend  the 
money  till  the  note  matures :  such  loan  like  every  other 
should  yield  interest :  this  is  discount. 

A  banker  is  a  trader  in  capital  and  credit.  The  func- 
tion of  a  bank  is,  on  the  one  hand,  to  receive  and  gather 
together  the  capital  of  such  as  desire  to  lend,  and  on  the 
other  hand,  to  place  this  capital  with  those  persons  who 
desire  to  borrow. 

The  business  of  a  bank  consists  principally  in  accept- 
ing deposits  subject  to  check,  cashing  checks,  arranging 
debits  and  credits  with  other  banks  through  the  clearing 
house,  discounting  commercial  paper,  issuing  bills  of  ex- 
change, lending  money,  promoting  enterprises  by  supply- 
ing the  initial  capital  and  by  underwriting,  and  lending 
on  mortgage.  A  bank  performs  one  or  more  of  these 
functions  according  to  the  objects  for  which  the  bank  is 
organized  and  chartered. 
"  16 


242  Elements  of  Political  Economy 

The  banknote  is  a  promise  to  pay  given  out  by  banks 
of  issue ;  it  is  payable  at  sight  and  to  bearer,  and  performs 
the  function  of  money. 

In  a  bank  of  issue,  the  discounts,  the  reserve,  and  the 
circulation  are  interdependent.  The  simultaneous  in- 
crease of  the  reserve  and  of  the  circulation  indicates  gen- 
eral confidence;  their  simultaneous  decrease  indicates  lack 
of  confidence;  the  increase  of  discounts  indicates  com- 
mercial prosperity. 

The  difference  between  the  banknote  and  fiat  money 
is  that  the  one  is  payable  at  sight  and  to  bearer,  the  other, 
although  legal  tender,  is  not  redeemable  at  sight. 

The  emission  of  fiat  money  is  a  kind  of  forced  loan 
which,  with  rare  exceptions,  is  injurious  both  to  foreign 
trade  and  to  domestic  trade. 

Banknotes  may  be  issued  under  various  systems,  vis.: 
entire  absence  of  control,  issue  general  but  controlled  by 
special  laws,  issue  confined  to  a  limited  number,  or  issue 
confined  to  a  single  institution. 

IV 

COMMERCE 

94.  Commerce.  95.  Domestic  Commerce  and  Foreign  Commerce. 
96.  Imports  and  Exports.  97.  Duties,  Protection  and  Free  Trade. 
98.  General  and  Special  Trade,  and  Transit.  99.  Exchange,  100. 
Commercial  Crises.  loi.  Commercial  Geography  and  Foreign  Com- 
petition.    102.  The  Role  of  Commerce  in  Civilization. 

94.  Commerce  consists  in  sale  and  purchase ,  i.  e.,  in 
the  exchange  of  merchandise  for  other  merchandise,  or, 
more  generally,  for  money. 

Division  of  labor  makes  of  society  a  great  co-partner- 
ship of  which  each  member  produces  only  certain  objects 
adapted  to  satisfy  the  needs  of  many  other  members,  and 


The  Circulation  of  Wealth  243 

in  return  receives  at  the  hands  of  many  others  the  things 
proper  to  his  personal  use.  The  further  this  division  is 
pushed,  the  broader  does  trade  become.  In  fact,  every 
individual,  unless  he  be  supported  by  his  family  or  lives 
by  begging,  performs  acts  of  trade,  since  he  is  constantly 
exchanging  services.  Even  he  who  lives  on  his  income 
cannot  escape  this  law.  Every  day  he  exchanges  money 
derived  from  his  income  against  merchandise  supplied  for 
his  use.  The  landed  proprietor  who  lives  on  his  rents  per- 
forms a  double  exchange,  an  exchange  of  the  use  of  his 
land  for  money,  and  exchange  of  the  money  for  the  things 
he  consumes.  But,  ordinarily,  we  confine  the  term  to 
those  who  make  a  calling  of  buying  and  selling. 

Although  they  do  not  create  a  product,  merchants  are 
producers  after  their  fashion.  To  produce  is  really  to 
create  a  utility,  to  render  a  service.  Do  they  not  render 
a  service,  do  they  not  incontestably  create  a  utility,  when 
they  bring  a  product  which  is  wanted,  within  the  reach  of 
the  consumer  who  would  otherwise  be  deprived  of  it  ?  Of 
what  use  to  him  is  the  coffee  on  the  plantation  in  Brazil? 
How  procure  it  unless  commerce  brings  it  to  New  York  ? 
How  could  one  be  sure  of  getting  bread  at  all  seasons  of 
the  year  unless  commerce  had  procured  and  stored  the 
wheat  for  the  demand  ?  To  transport,  store  and  exchange 
products,  these  are  the  three  services  rendered  by  com- 
merce. The  object  of  commerce  is  to  carry  products, 
often  from  one  place  to  another,  or  from  one  season  or 
period  to  another,  always  from  one  owner  to  another. 

It  must  be  added  that  the  transfer  from  one  owner  to 
another,  i.  e.,  exchange,  is  the  sole  essential  element,  since 
merchants  constantly  buy  and  sell  without  transporting  or 
storing  merchandise,  whilst  transporting  and  storing 
alone  do  not  constitute  a  commercial  transaction. 


244  Elements  of  Political  Economy 

We  may  add  that  commerce  is  a  form  of  work  which, 
like  all  useful  work,  adds  to  the  value  of  products. 

95.  Domestic  and  Foreign  Commerce. — Commerce 
is  the  exchange  of  products :  it  proceeds  from  division  of 
labor  and  fosters  such  division. 

We  may  of  course  imagine  a  primitive  state  of  in- 
dustry where  there  was  no  division  of  labor  but  where 
trade  was  not  entirely  unknown.  The  hunter  may  have 
found  himself  without  food  and  exchanged  arrows  for  it. 
Nevertheless,  we  may  say  that,  as  a  rule,  trade  founded  on 
the  division  of  labor  and  diversity  of  products,  tends  to 
increase  and  extend  accordingly  as  a  people  become  richer. 
At  first  the  great  mass  of  daily  transactions  are  within 
small  isolated  groups  which  have  but  limited  communica- 
tion with  each  other.  Presently  the  group  grows  and  sev- 
eral groups  begin  to  communicate  or  unite  for  purposes  of 
security  or  intercourse.  Relations,  followed  by  trade, 
are  thus  gradually  established  between  all  parts  of  the  land 
which  have  anything  to  sell  or  buy. 

We  may  thus  distinguish  in  theory,  three  epochs  in 
the  growth  of  commerce : 

First,  the  purely  agricultural,  in  which  each  man  lived 
solely  upon  the  things  he  himself  procured  by  hunting  or 
from  his  land,  and  where  division  of  labor  was  only  rudi- 
mentary and  accidental. 

Second,  that  in  which  the  craftsmen  of  a  given  local- 
ity organized,  one  confining  himself  to  making  shoes,  an- 
other to  building  houses,  etc.,  but  where  ordinarily  trade 
was  limited  to  the  district,  and  the  division  of  labor  was 
purely  individual. 

Third,  that  in  which  districts  and  states  trade  together, 
each  bringing  to  the  markets  that  are  open  to  it  the  thing 
which  it  produces  best  or  cheapest;  one  food  products, 


The  Circulation  of  Wealth  245 

another  raw  material,  a  third  manufactures,  just  as  in 
the  previous  epoch  each  man  performed  in  his  own  district 
the  work  for  which  he  was  best  quahfied.  In  this  last 
stage  appears  the  territorial  division  of  labor. 

Where  fix  a  limit  to  this  extension  of  trade  rela- 
tions? Logically  it  cannot  have  any  other  limit  than  that 
of  the  round  earth.  Wherever  wealth  exists,  either  nat- 
ural or  produced  by  human  effort,  it  is  useful  to  transport 
it  to  all  places  where  it  may  find  purchasers,  i.  e.,  to  give 
rise  to  an  exchange  of  services  between  two  individuals. 
Nevertheless,  statecraft  and  political  economy  unite  in  set- 
ting up  a  difference  between  the  exchanges  which  take 
place  within  a  state,  termed  domestic  commerce,  and  ex- 
changes from  one  state  to  another  termed  foreign  com- 
merce. 

In  all  epochs  and  countries,  domestic  commerce,  al- 
though often  less  imposing,  has  been  much  more  impor- 
tant than  foreign  commerce  in  the  total  of  the  exchanges 
to  which  it  has  given  rise.  To-day  in  most  civilized 
states,  domestic  commerce  is  free  and  we  know  that  the 
results  are  accepted  without  a  murmur;  they  are  bene- 
ficial. For  example,  we  do  not  complain  that  wheat 
growing  on  the  western  prairies  constitutes  a  damaging 
competition  to  wheat  growing  in  New  England,  or  that 
the  competition  of  New  England  factories  makes  it  more 
difficult  to  establish  manufactories  in  Minnesota, 

96.  Imports  and  Exports.  —  Foreign  commerce, 
which  in  its  nature  differs  in  nowise  from  domestic  com- 
merce, is  almost  universally  subject  to  legal  regulations. 
It  consists,  like  all  exchange,  in  a  double  movement,  that 
of  the  thing  sold  and  of  the  thing  bought.  That  which 
a  nation  transports  beyond  its  borders  as  merchandise 
which  it  has  sold  or  intends  to  sell  to  foreign  nations  is 


246  Elements  of  Political  Economy 

termed  exports.  That  which  enters  from  abroad  is 
termed  imports.  For  a  given  nation,  imports  accordingly 
signify  for  the  most  part  purchases,  and  exports  sales. 

It  would  seem  that,  in  principle,  a  nation  conducts  an 
exchange  exactly  like  an  individual.  Exchanging  value 
for  value,  it  exports  the  equivalent  of  that  which  it  im- 
ports. There  is  but  one  situation,  a  sufficiently  rare  one, 
where  the  analogy  does  not  hold ;  it  is  when  the  commod- 
ity exported  perishes  en  route  by  shipwreck  or  otherwise. 
But  in  practice  a  nation  acts  quite  differently  from  an  in- 
dividual. 

Merchants  nearly  always  buy  with  money  or  that 
which  represents  money;  when  they  sell  they  receive 
money  or  that  which  represents  money.  The  balance 
goes  into  their  coffers  and  at  the  end  of  the  year  they  see 
the  profit  derived  from  increasing  the  number  of  ex- 
changes. 

Although  the  commerce  of  a  nation  is  composed  of  the 
sum  of  the  exchanges  of  individuals,  the  process  is  not  the 
same  as  in  the  case  of  domestic  exchange.  The  money 
which  has  served  as  a  measure  of  value  in  each  exchange 
is  in  fact  relegated  to  the  rear  and  rarely  serves  for  actual 
payment.  Nearly  all  the  debtors  of  a  given  nation  make 
their  payments  by  means  of  drafts  drawn  on  the  debtors 
of  the  other  nation,  and  the  debts  are  thus  balanced.  The 
balance  is  not  necessarily  established  in  the  course  of  a 
single  year.  Nor  is  the  settlement  necessarily  made  di- 
rectly between  the  two  nations  trading.  Thanks  to  the 
agency  of  banks,  the  credits  and  debts  of  several  nations 
may  contribute  to  the  settlement.  Nor  again  need  it  be 
made  entirely  in  the  value  of  merchandise  sold;  securi- 
ties, mortgages  on  real  estate,  ocean  freights,  or  outlays 
in  foreign  travel,  may  all  contribute  to  it. 


The  Circulation  of  Wealth  247 

For  a  long  time  the  erroneous  belief  obtained — in  fact 
it  has  not  yet  been  entirely  destroyed — that  a  nation  is  en- 
riched only  by  that  which  it  sells  abroad,  and  is  impover- 
ished to  the  extent  of  its  purchases  abroad;  that 
consequently : 

1.  The  exportations  should  be  as  large  as  possible 
and  the  importations  as  small  as  possible. 

2.  The  difference  between  exports  and  imports  is 
paid  in  the  precious  metals  and  constitutes  a  gain  or  loss 
as  the  case  may  be.  This  idea  is  expressed  by  saying  that 
the  balance  of  trade  is  favorable  or  unfavorable. 

This  doctrine  which  has  exercised  a  baneful  influence 
upon  tariff  regulations  supposes:  i.  That  a  nation  may 
export  without  importing,  sell  without  buying:  a  false 
supposition.  2.  That  the  precious  metals  constitute  the 
only  desirable  wealth :  also  false.  3.  That  the  official 
figures  of  imports  and  exports  exactly  represent  the  value 
of  the  commerce,  and  that  the  account  must  be  settled  an- 
nually with  a  sum  of  gold  or  silver  corresponding  exactly 
to  the  balance :  false  again. 

Bastiat,  the  French  economist,  has  supplied  a  lively 
criticism  of  this  pretence  of  calculating  national  gain  or 
loss  by  the  balance  of  trade.  "I  found  myself  at  Bor- 
deaux," says  he,  "with  a  cask  of  wine  worth  50  francs. 
This  I  shipped  to  Liverpool  and  the  French  customs  re- 
corded an  export  of  50  francs.  On  its  arrival  at  Liver- 
pool the  wine  was  sold  by  my  correspondent  for  70  francs. 
My  correspondent  invested  the  proceeds  in  coal  which  de- 
livered at  Bordeaux  was  worth  90  francs.  The  French 
customs  hasten  to  record  an  importation  of  90  francs. 
The  balance  of  trade  in  this  instance  is  against  France  by 
40  francs.  These  40  francs  I  always  believed  on  the  tes- 
timony of  my  accounts  were  a  gain  to  me.     The  advo- 


248  Elements  of  Political  Economy 

cates  of  the  balance  of  trade  theory  inform  me  that  I  have 
lost  40  francs  and  that  France  has  lost  that  sum  through 
me.  Again  I  had  sent  to  me  from  the  country  a  lot  of 
truffles  worth  100  francs.  They  were  bought  for  two 
celebrated  English  ministers  whose  liberal  price  for  them 
I  invested  in  books  in  England.  Alas!  according  to  the 
theorist,  it  would  have  been  better  to  have  eaten  them  my- 
self (I  mean  the  truffles  and  not  the  books  nor  the  tories). 
But,  as  it  happened,  not  everything  was  lost,  since  the  ship 
which  carried  the  books  foundered  on  leaving  port  and  the 
French  customs  which  had  recorded  an  export  of  100 
francs  was  not  called  upon  to  record  any  imports  in  return. 
Once  more,  according  to  the  balance  of  trade  theory, 
France  has  gained  100  francs  since  it  is  by  that  sum, 
thanks  to  the  shipwreck,  that  the  exports  exceed  the  im- 
ports." 

97.  Duties,  Protection  and  Free-trade. — To  record 
the  movements  of  foreign  commerce  to  collect  taxes  upon 
the  merchandise  which  enters  or  leaves,  governments  have 
established  customs  houses  on  their  borders.  Customs 
embrace  taxes  both  on  imports  and  on  exports. 

Export  duties  are  rare  because  as  a  rule  governments 
regard  it  as  good  politics  to  encourage  the  sale  of  natural 
products  abroad.  And  here  they  are  right.  An  excep- 
tion to  the  rule  is  where  a  given  country  practically  enjoys 
a  monopoly  of  an  agricultural  or  mineral  product,  and 
under  the  form  of  an  export  duty  levies  a  tax  on  it  which 
is  paid  principally  by  the  foreign  purchaser. 

Taxes  on  imports  are  numerous  and  figure  as  one  of 
the  important  sources  of  revenue  in  nearly  all  civilized 
countries.  They  are  determined  under  different  customs 
systems :  the  restrictive  system  which  includes  prohibi- 
tion and  protection  :  the  liberal  system  which   is  based 


The  Circulation  of  Wealth  249 

upon  the  principle  of  free  trade  and  tariff  for  revenue 
only.  The  restrictive  system  imposes  actual  prohibition 
or  heavy  taxes  on  the  products  of  certain  foreign  indus- 
tries, less  with  a  view  to  public  revenue  than  to  impede  or 
discourage  the  importation  of  such  products.  Its  declared 
object  is  the  protection  of  home  industry,  hence  the  name 
protective  system.  The  mercantile  system  which  aims  to 
regulate  duties  with  a  view  to  having  exports  exceed  im- 
ports and  of  receiving  the  difference  in  precious  metals,  is 
a  kind  of  protective  system.  Prohibition  or  the  prohibi- 
tive system  is  the  protective  system  carried  to  its  extreme 
limit.  The  compensatory  system  which  aims  by  means 
of  import  duties  to  compensate  the  home  producer  for 
the  internal  revenue  tax  imposed  upon  him,  is  an  attenu- 
ated form  of  the  protective  system. 

Protection  is  based  upon  the  following  reasoning.  It 
is  well  for  a  rich  nation  to  engage  in  all  the  great  indus- 
tries, agricultural  or  manufacturing,  which  its  resources, 
or  ability  to  procure  raw  material,  permit ;  and  it  is  proper 
that  its  government,  the  guardian  of  the  national  welfare, 
should  favor  the  development  of  such  industries.  If  a 
foreign  nation  produces  certain  foodstuffs,  or  manufac- 
tures a  certain  article  cheaper  than  it.  the  government  must 
place  upon  such  foodstuffs  or  article  a  duty  sufficient  to 
cause  it  to  sell  higher  than  the  home  product  so  that  the 
latter  may  have  an  advantage  in  the  home  market.  In 
this  way  a  competition  is  avoided,  which,  in  the  opinion 
of  the  protectionists,  would  prove  ruinous  to  the  home  in- 
dustry. They  hope  that  in  this  way  home  production 
may  be  sustained  or  even  developed  because  protection 
gives  it  a  kind  of  home  monopoly.  Several  considera- 
tions are  advanced  in  favor  of  this  system :  to  give  to 
the  country  necessary  or  lucrative  industries  which  foreign 


250  Elements  of  Political  Economy 

competition  might  have  stifled  in  their  infancy ;  to  assure 
to  the  farmer  and  manufacturer  a  certain  revenue,  and  to 
the  working  class  employment  and  well-being;  to  render 
the  country  independent  by  freeing  it  from  the  necessity 
of  buying  from  the  foreigner  products  of  which  he  is  pre- 
sumed to  have  acquired  a  monopoly  after  having  ruined 
the  home  industry. 

Undoubtedly  it  is  the  duty  of  the  government  to  de- 
velop the  productive  forces  of  the  nation :  it  does  it  for 
example  when  it  supports  schools.  In  principle  we  cannot 
deny  it  the  right  to  encourage  industry.  But  is  resort 
to  a  protective  tariff  a  wise  method  of  encouraging  in- 
dustry ? 

I.  It  imposes  a  tax  of  which  it  is  almost  impossible 
to  measure  the  extent.  When  the  national  legislature 
levies  a  duty  of  thirty  dollars,  for  example,  on  merchan- 
dise worth  one  hundred  and  thirty  dollars  in  the  home 
market,  it  is  because  the  government  estimates  that  the 
foreign  manufacturer  can  produce  for  one  hundred  dol- 
lars merchandise  which  the  home  manufacturer  cannot 
produce  for  less  than  one  hundred  and  thirty  dollars,  and 
because  it  believes  it  to  be  judicious  to  make  the  consumer 
pay  the  additional  thirty  dollars. 

Now  what  is  the  extent  of  the  sacrifice  imposed  upon 
the  consumer  by  this  increase  in  price?  Very  little  per- 
haps if  the  industry  languishes.  But  if  it  prospers — and 
this  is  the  result  hoped  for — the  sacrifice,  or  tax  upon  con- 
sumption for  the  benefit  of  certain  manufacturers,  is  mul- 
tiplied by  the  number  of  units  of  the  produce  sold,  and 
may  reach  a  considerable  sum,  which  sum  is  an  unknown 
quantity.  If  the  government,  instead  of  instituting  a 
protective  tariff  had  promised  a  bounty  to  the  home  pro- 
ducer, as  is  sometimes  done,  especially  in  connection  with 


The  Circulation  of  Wealth  251 

shipbuilding,  it  would  perhaps  have  regretted  the  step, 
but  it  would  at  least  have  known  the  extent  of  the  sacri- 
fice demanded  of  the  nation. 

2.  When  a  government  inaugurates  a  protective  tar- 
iff it  intends  to  establish  it  simply  for  a  period  of  time 
sufficient  to  build  up  the  protected  industries.  It  is  pro- 
claimed as  a  kind  of  tutelage.  The  parties  interested 
would  perhaps  not  dare  to  ask  it  if  they  suffered  men  to 
believe  that  the  duty  would  be  perpetual.  Nevertheless 
history  presents  but  few  examples  of  an  industry  coming 
to  the  government  voluntarily  to  declare  itself  adult  and 
no  longer  in  need  of  protection.  There  are  good  reasons 
for  this. 

No  manufacturer,  no  matter  how  much  his  industry 
prospers,  ever  considers  his  profits  too  large.  Again, 
whilst  one  manufacturer  conducts  a  profitable  business, 
there  are  many  capitalists  and  entrepreneurs  who  seek  a 
living  by  the  same  business,  and  according  to  the  situation 
or  ability  of  each,  there  establishes  itself  a  gradation  of 
profits  from  the  entrepreneurs  who  make  fortunes  down  to 
those  who  barely  vegetate.  Now,  for  these  last,  the  least 
abatement  of  the  tariff,  no  matter  how  small,  will  always 
mean  ruin. 

3.  When,  despite  obstacles,  a  goverment,  desirous 
of  catering  to  interests  other  than  those  of  the  privileged 
manufacturers,  lowers  the  duties,  the  home  industry  which 
is  thereby  exposed  to  foreign  competition  is  not  necessarily 
destroyed.  It  runs  risk  of  suffering  at  first  and  of  wit- 
nessing the  badly  organized  succumb;  but  such  as  are  in 
better  condition  survive  and  are  transformed,  the  industry 
sometimes  finding  in  the  removal  of  the  tariff  a  stimulus 
which  leads  to  growth. 

4.  When  protection  operates  equally  upon  all  im- 


252  Elements  of  Political  Economy 

ported  articles,  it  produces  a  general  dearness  and  perhaps 
an  isolation  of  the  nation  in  question  if  the  duties  prove 
prohibitive.  In  this  case  the  economic  interests  of  the 
nation  suffer  through  the  restriction  placed  upon  foreign 
commerce.  But  in  reality,  protection  is  a  privilege  con- 
ferred upon  a  small  number  of  industries.  Ordinarily, 
these  industries  are  not  the  modest  ones,  but,  on  the  con- 
trary, amongst  the  most  powerful,  since  it  is  just  they  that 
have  sufficient  influence  to  secure  a  protective  tariff  from 
the  government.  Great  inequality  thus  results  between 
different  classes  of  producers. 

5.  The  result  is  that  if  protective  tariffs  provide  em- 
ployment it  is  for  only  a  fraction  of  the  working  popula- 
tion. Now,  as  the  average  wage  in  protected  industries 
is  no  greater  than  the  general  average  in  the  unprotected 
industries,  we  are  forced  to  conclude  that  such  tariffs  do 
not  exercise  the  beneficial  influence  upon  real  wages  gen- 
erally attributed  to  them. 

In  England  better  wages  were  paid  for  many  years 
without  protection  than  were  paid  in  France  and  Germany 
with  protection.  Wages  are  higher  in  the  United  States 
principally  because  of  the  superior  economic  conditions  of 
a  land  so  rich  in  agricultural  and  mineral  resources,  and 
because  of  the  superior  efficiency  of  labor,  not  because  of 
the  protective  tariff. 

6.  In  order  to  render  a  nation  completely  independent 
of  foreign  nations  in  certain  industries,  such  as  silk  fab- 
rics, for  example,  it  is  not  sufficient  to  check  the  importa- 
tion of  the  manufactured  product;  the  nation  must  like- 
wise procure  the  raw  material  without  recourse  to  the  for- 
eigner, that  which  is  impossible  for  many  countries.  The 
truth  is,  in  the  first  place,  that  modern  industry  and  com- 
merce do  not  permit  nations  to  ignore  each  other ;  in  the 


The  Circulation  of  IVcalth  253 

second  place,  that  a  nation  is  not  wholly  dependent  on  any 
one  foreign  nation  because  of  the  competition  from  other 
countries,  and  because  of  home  competition. 

7.  If  protection  is  applied  to  agricultural  products 
which  constitute  the  necessaries  of  life,  such  as  grain  and 
meat,  it  enhances  the  cost  of  living  especially  of  the  work- 
ing classes,  makes  money  wages  higher,  or  decreases  the 
•  efficiency  of  labor  by  lowering  the  standard  of  living,  and 
thus  puts  the  industries  of  the  nation  at  a  disadvantage 
in  competition  with  other  countries.  Although  the  addi- 
tional charge  on  the  products  at  first  be  slight,  it  may  in- 
crease indefinitely.  The  barrier  of  the  tariff  prevents  the 
level  of  prices  from  establishing  itself  on  both  sides  of  the 
border ;  it  makes  possible  cheapness  abroad  resulting  from 
abundance,  side  by  side  with  dearness  at  home  resulting 
from  scarcity.  It  may  thus  happen  that  the  nation  prac- 
ticing protection  of  agricultural  products  may  some  day 
find  that  it  has  fallen  behind  other  civilized  nations. 

Laws  whose  object  it  is  to  alter  the  natural  equilib- 
rium of  prices  are  always  dangerous. 

Free-trade  concerns  itself  less  with  the  interests  of  a 
certain  class  of  producers  than  with  the  general  interest, 
and  above  all,  with  the  interest  of  the  consumer.  Its  ob- 
ject is  to  encourage  foreign  commerce  and  to  provision 
the  home  market  as  plentifully  as  possible  and  at  the  low- 
est prices. 

The  theory  of  free-trade  is  based  on  sound  economic 
principles. 

To  trade  is  to  labor :  all  the  principles  of  non-inter- 
ference which  apply  to  industry  apply  with  equal  force 
to  home  and  foreign  commerce. 

To  buy  where  one  wishes  is  likewise  a  tenet  of  liberty : 

As   foreign   commerce  between  the  nations  consists 


254  Elements  of  Political  Economy 

principally  in  the  exchange  of  product  for  product,  and 
as,  in  order  to  buy  goods  to  import,  it  is  nearly  always 
necessary  to  produce  something  to  export,  a  nation  can- 
not, to  use  a  metaphor  sometimes  employed,  be  "inun- 
dated" with  foreign  products  except  approximately  in  the 
degree  to  which  the  nation  itself  "inundates"  foreign  mar- 
kets with  its  own  products. 

Imports  introduce  merchandise  which  the  nation  either 
does  not  produce  or  which  it  produces  to  less  advantage. 
In  the  first  instance  the  result  is  a  benefit  for  every  one ; 
in  the  second  it  stimulates  the  home  manufacturer  to  better 
his  production  and  becomes  at  one  and  the  same  time  a 
cause  of  cheaper  products  for  commerce  and  of  improved 
methods  on  the  part  of  the  manufacturer. 

These  considerations  may  be  embodied  in  the  two  fol- 
lowing propositions,  one  of  which  contains  the  principles, 
the  other  the  consequences  : 

Free-trade,  with  reference  to  the  producer  is  synony- 
mous with  free  labor;  with  reference  to  the  general  re- 
sults of  exchange,  is  synonymous  with  extension  of  the 
market;  and  with  reference  to  industry,  is  synonymous 
with  cheaper  production. 

Under  the  protective  system  we  pay  for  certain  mer- 
chandise more  than  it  is  worth ;  under  free-trade  we  pay 
for  merchandise  that  which  it  is  worth. 

By  virtue  of  these  principles  and  their  consequences, 
absolute  free-trade  demands  the  complete  suppression  of 
import  and  export  duties  in  all  countries. 

The  tariff  for  revenue  only  is  less  exacting.  It  re- 
gards a  tax  on  consumption  as  legitimate  and  considers  it 
proper  to  levy  this  tax  on  imports.  It  admits  the  legiti- 
macy of  a  tariff  as  a  source  of  public  revenue  but  not  as 
a  hindrance  to  the  entry  of  foreign  merchandise.     Accord- 


The  Circulation  of  Wealth  255 

ingly  it  imposes  only  moderate  duties  with  a  view  to  im- 
peding foreign  commerce  as  little  as  possible  and  of  realiz- 
ing from  the  duties  an  increase  of  public  revenue. 

Protection  is  one  of  the  economic  questions  most  fre- 
quently discussed  in  political  assemblies  and  most  prone 
to  excite  the  passions  because  the  words  protection  and 
free-trade  touch  the  greatest  interests,  private  and  public. 
The  tariff  for  revenue  only,  which  in  our  time  is  the  best 
adapted  to  further  the  interests  of  great  manufacturing 
and  commercial  nations,  is  far  from  having  won  the  ap- 
proval of  all  statesmen.  On  the  contrary,  although  polit- 
ical economy  demonstrates  the  advantages  and  equity  of 
free-trade,  private  interests  resist  and  often  triumph,  sup- 
ported as  they  are,  by  considerations  political  properly  so- 
called. 

98.  General  Commerce,  Special  Commerce  and 
Transit,  Bonded  Warehouses  and  Public  Exchanges. — 
Merchandise  may  pass  and  re-pass  the  frontier  without 
having  been  the  object  of  exchange  within  the  country. 
It  comes  to  seek  a  purchaser  which  it  fails  to  find,  or  it 
simply  traverses  the  territory  to  reach  another  territory. 
It  would  not  be  fair  to  make  it  pay  duty.  This  is  why  in 
many  countries  the  customs  regulations  divide  foreign 
commerce  into  two  classes :  general  commerce,  embrac- 
ing all  the  merchandise  which  enters  or  leaves,  no  matter 
of  what  kind  nor  who  the  owner,  and  special  commerce, 
embracing  solely  in  the  matter  of  imports  the  foreign  mer- 
chandise which  enters  for  home  consumption,  and,  with 
reference  to  exports,  only  exported  merchandise  which  has 
been  produced  at  home  or  actually  acquired  by  home  mer- 
chants. 

Foreign  merchandise  which  seeks  a  purchaser  and  on 
which  it  is  not  desirable  to  pay  the  duty  until  the  pur- 


256  Elements  of  Political  Economy 

chaser  is  found,  is  stored  in  bonded  zvarehouses.  It  re- 
mains there  for  such  period  as  the  owner  desires  and 
leaves  freely,  without  paying  a  tax,  when  it  is  desired  to 
send  it  abroad;  in  this  case  it  figures  simply  as  imports 
and  exports  of  general  commerce.  But  if  consumed  in 
the  warehouse,  or  if  it  leaves  in  order  to  be  sold  in  the 
country,  it  pays  a  duty,  and  figures  as  imports  in  special 
commerce,  after  having  already  figured  as  general  com- 
merce. 

Bonded  warehouses  and  public  storehouses  facilitate 
transactions  on  the  public  exchange,  where  the  auction 
sales  are  surrounded  by  legal  guarantees  which  encourage 
wholesale  trade. 

Merchandise  which  simply  passes  through  a  given 
country  from  one  foreign  country  to  another,  pays  no 
duty  and  does  not  figure  in  tables  of  special  commerce. 

Tariffs  give  rise  to  very  complex  fiscal  regulations. 
When  a  merchant  imports  goods  which  he  exports  again 
he  pays  no  duty.  But  when  a  French  miller  imports  from 
Russia  wheat  and  exports  it  to  Switzerland  in  the  form  of 
flour,  when  the  machinist  gets  from  England  iron  and 
steel  to  be  turned  into  machines  for  export  to  Italy,  what 
course  should  be  pursued  ?  It  would  not  be  right  to  make 
him  pay  duty  just  as  if  the  article  had  been  consumed 
within  the  country;  moreover  it  would  be  injurious  to  the 
national  industries  to  increase  in  this  manner  the  cost  of 
production  of  articles  intended  for  foreign  markets.  In 
this  case  a  drawback  may  be  paid  on  exportation  of  the 
goods  equal  to  the  duty  collected  on  the  raw  material 
which  entered  into  their  manufacture,  or  the  raw  material 
may  be  admitted  free  under  certain  guarantees  which  pro- 
vide for  its  future  exportation  after  certain  work  shall 
have  been  bestowed  upon  it;  this  latter  is  called  tempo- 


The  Circulation  of  Wealth  257 

rary  entry.  Sometimes  the  customs  laws  provide  for  more 
than  simple  reimbursement;  they  attempt  special  protec- 
tion by  allowing-  a  premium.  As  a  rule,  the  less  complex 
the  tariff  regulations  the  better,  exacting  less  labor  and 
giving  less  opportunity  for  fraud. 

99.  Exchange.  In  foreign  commerce  the  metallic 
and  fiduciary  circulation  are  not  always  in  a  state  of  equi- 
librium. If  a  nation  has  sold  much  to  another  nation 
without  having  bought  equally  as  much,  it  becomes  the 
latter's  creditor  and  the  balance  due  must  be  settled  in 
specie,  securities,  or  some  other  form  of  value. 

The  bankers  and  merchants  of  the  debtor  country 
must  then  buy  the  money  of  the  creditor  country  to  remit 
to  it.  This  money,  sought  in  the  market  of  the  debtor 
country,  commands  a  premium,  like  all  scarce  articles. 
Thus  the  pound  sterling  is  worth  $4.86/^.  If  the  United 
States  is  required  to  remit  much  money  to  England  it  pays 
in  New  York  for  the  pound  more  than  $4.86/^.  It  may 
pay  over  $4.90,  as  has  been  the  case  on  more  than  one  oc- 
casion since  the  resumption  of  specie  payment.  On  the 
other  hand,  if  it  is  England  which  is  called  upon  to  make 
heavy  payments  in  the  United  States  the  pound  may  sell 
in  New  York  below  $4.82.  This  difference  between  par 
and  the  market  price  is  called  exchange. 

Exchange  is  unfavorable  to  a  nation  whose  money 
is  below  par  and  favorable  to  the  nation  whose  money  is 
above  par. 

Before  resorting  to  the  purchase  and  shipment  of 
specie,  which  is  costly,  the  debtor  merchants  try  to  buy 
drafts,  or  bills  of  exchange,  drawn  on  the  creditor  nation, 
in  order  to  discharge  their  debt  with  evidences  of  debt. 
They  generally  find  them ;  since,  if  the  United  States  is 
at  a  given  moment  the  debtor  of  England,  England  may 

17 


258  Elements  of  Political  Economy 

be  perhaps  in  debt  to  Germany  and  France,  and  the  bank- 
ers may  offer  to  their  American  cHents  German  or  French 
bills  drawn  upon  English  merchants.  But  these  drafts, 
sought  like  money,  like  it,  command  a  premium,  though 
in  a  different  proportion,  and  one  still  says  that  exchange 
is  favorable  for  one  nation  and  unfavorable  for  another. 

The  definition  may  be  generalized  so  as  to  render  it 
applicable  even  to  two  localities  in  the  same  land  by  say- 
ing :  Exchange  is  the  price  in  a  given  place  of  a  speciHed 
sum  of  money  deliverable  elsewhere. 

It  is  favorable  to  the  nation  or  locality  of  which  the 
money  and  bills  are  at  a  premium  in  another  nation  or 
locality,  i.  e.,  to  the  nation  which  has  more  credits  than 
debts  upon  the  foreign  market.  On  the  other  hand,  ex- 
change is  unfavorable  to  a  nation  which  has  upon  a  for- 
eign market  more  debts  than  credits,  and  of  which  the 
money  and  bills  are  at  a  discount. 

These  fluctuations  in  exchange  are  always  confined  to 
narrow  limits  because  the  premium  which  one  consents 
to  pay  cannot  exceed  greatly  the  cost  of  transporting  the 
specie  itself  from  the  home  of  the  debtor  to  that  of  the 
creditor.  The  cost  of  transporting  gold  from  New  York 
to  London  varies  from  13^  to  2]^  cents  per  pound  sterling. 

Exchange  may  be  considered  as  a  sort  of  barometer 
which  it  is  useful  to  know  how  to  consult,  but  to  which 
we  must  not  attach  too  much  importance.  It  is  in  fact 
nothing  more  than  the  barometer  of  the  movements  of  the 
precious  metals,  the  instrument  of  commerce.  Favorable 
exchange  indicates  simply  a  balance  of  exportations ;  un- 
favorable exchange  a  balance  of  importations.  That  does 
not  necessarily  imply  that  a  nation  is  growing  either  rich 
or  poor. 

100.     Crises.     In  the  home  trade  of  a  nation  as  well 


The  Circulation  of  Wealth  259 

as  in  foreign  commerce  there  are  fluctuations  of  another 
kind  which  we  call  crises  and  which  are  a  diminution  in 
production,  consumption  or  circulation  of  wealth,  and  a 
rupture  of  the  equilibrium  established  between  these  dif- 
ferent branches  of  economic  activity. 

The  enterprising  man,  at  the  moment  he  enters  upon 
an  undertaking,  does  not  yet  know  exactly  to  what  ex- 
tent the  commodity  will  be  consumed.  It  is  well  that  he 
possesses  a  certain  amount  of  boldness  in  his  enterprise; 
for  it  is  the  abundance  and  cheapness  of  products  which 
partly  determine  the  extent  of  consumption.  He  accord- 
ingly ventures  a  certain  amount  of  capital  which  he  hopes 
to  recover  and  repay  within  a  reasonable  time.  When 
the  moment  arrives,  will  the  capital  really  be  free  and 
available?  Here  is  something  which  he  can  only  pre- 
sume will  happen.  Production,  capital,  consumption,  are 
three  terms  closely  affiliated,  terms  which  increase  or  di- 
minish together,  but  which,  nevertheless,  do  not  keep  such 
even  step  but  that  one  is  sometimes  in  advance  of  the  other. 

As  a  natural  result  of  the  spirit  of  enterprise,  it  is 
often  production,  industrial  and  commercial  production, 
which  tends  to  quicken  its  pace.  In  prosperous  times, 
when  capital  is  abundant  and  production  barely  meets  the 
needs  of  the  consumer,  many  entrepreneurs  apply  them- 
selves to  production  or  buy  goods  to  sell  again.  It  is  at 
such  times  that  we  witness  the  construction  of  factories, 
the  founding  of  great  corporations,  or  speculation  for  a 
rise  in  values.  The  speculator  buys  in  the  hope  of  being 
able  to  sell  again  later  on  at  an  advance.  He  lacks  the 
ready  money  to  pay  for  his  purchases,  but  he  expects  to 
have  it  when  he  shall  have  sold  again.  His  hopes  are  rea- 
lized and  at  the  end  of  a  given  period  he  has  the  money 
and  a  profit,  growing  rich  perhaps  by  frequently  renewing 


26o  Elements  of  Political  Economy 

the  same  operation.  Thousands  of  speculators  do  like- 
wise and  the  manufacturers  work  incessantly  to  furnish 
them  with  various  commodities. 

But  there  arises  a  moment  when  the  spring  snaps. 
Where  capital  is  tied  up  it  requires  time  to  free  it  or  to 
create  fresh  capital.  Now  speculation  cannot  wait. 
Once  launched  on  its  upward  flight  on  the  wings  of  credit 
it  may  not  rest,  for  only  the  continuation  of  credit  and 
high  prices  permit  it  to  meet  its  engagements.  Not  so 
with  consumption  which  ends  by  protesting  and  by  limit- 
ing its  needs.  Consumption  no  longer  keeps  pace  with 
production.  Though  the  separation  may  not  be  appar- 
ent at  first,  the  least  accident  may  discover  it.  A  bad  har- 
vest perhaps  compels  the  nation  all  at  once  to  use  a  larger 
proportion  of  its  income  for  necessaries,  and,  consequently, 
to  buy  less  of  other  things.  A  war,  or  menace  of  war, 
interferes  with  the  negotiation  of  time  bills  and  paralyzes 
trade.  Disaster  on  one  of  the  great  markets  of  the  world 
which  has  its  efifect  upon  other  markets,  or  the  failure  of 
some  great  banking  house  which  has  suffered  by  specula- 
tion and  involves  the  market  in  its  fall,  may  precipitate  it. 

There  must  ensue  a  decline  in  values,  and  this  cannot 
come  about  without  disruption  and  suffering;  the  crisis 
is  upon  us.  Speculators  for  a  rise  resist  a  while,  continue 
to  buy  or  refuse  to  sell  at  the  lower  values  and  at  this 
moment  make  their  liveliest  appeals  to  credit.  The  dis- 
counts of  the  banks  are  larger  than  ever,  and  the  circula- 
tion of  bank  notes  increases  while  the  reserve  diminishes. 
At  length  it  is  necessary  to  give  way,  the  resistance  having 
served  simply  to  aggravate  the  losses,  and  the  crisis  ends 
in  numerous  failures,  in  a  shrinkage  of  business,  of  cir- 
culation and  often  of  the  bills  presented  for  discount.  It 
is  a  period  of  apathy,  of  dullness.     Prices  are  low  and 


The  Circulation  of  Wealth  261 

capital  accumulates  in  the  banks.  This  period  may  be 
considered  as  a  period  of  liquidation  of  the  crisis.  Its 
duration  may  be  short  and  in  this  event  there  is  a  real 
liquidation ;  or  it  may  be  protracted  either  by  the  incom- 
pleteness of  the  liquidation  or  by  persistence  of  the  causes 
which  occasioned  the  general  evil,  there  being  the  while 
less  liquidation  than  general  apathy  of  the  market.  This 
is  termed  a  commercial  crisis. 

At  other  times  the  disturbance  is  less  general.  It  may 
proceed  solely  from  trouble  in  the  monetary  circulation 
caused  ordinarily  by  an  excessive  exportation  of  the  pre- 
cious metals :  this  is  called  a  monetary  crisis. 

Crises  appear  to  be  a  sort  of  periodical  malady  inher- 
ent in  our  economic  organization,  without,  however,  any 
precise  period  of  recurrence.  Political  events,  harvests, 
economic  institutions,  commercial  customs  of  a  people  all 
may  precipitate  or  modify  them. 

loi.  Commercial  Geography  and  International  Com- 
petition.— Within  the  same  state  there  exists  a  territorial 
division  of  labor,  founded  on  the  diversity  of  the  produc- 
tions peculiar  to  each  district.  There  exists,  all  the  more, 
a  diversity  of  natural  productions  between  different  coun- 
tries and  regions  of  the  world. 

Minerals  are  found  principally  in  mountainous  re- 
gions and  in  ancient  formations.  Vegetable  substances 
and  animals  are  subject  to  the  law  of  climates  and  their 
production  depends  in  the  first  place  upon  latitude  and  alti- 
tude; in  the  second  place,  upon  the  nature  and  situation 
of  the  land.  This  diversity,  due  to  physical  causes,  is 
one  of  the  reasons  for  the  existence  of  trade  between  na- 
tions. 

However,  we  must  not  think  that  nature,  the  passive 
element,  is  the  sole  cause  of  the  diversity  of  productions 


262  Elements  of  Political  Economy 

of  each  country.  Man,  the  active  element,  in  this  respect, 
does  more  than  nature.  This  is  the  double  aspect  of 
which  we  must  not  lose  sight  when  we  study  commercial 
geography  and  seek  to  explain  the  kind  and  importance 
of  the  traffic  of  nations  with  each  other.  In  fact,  it  is  in 
countries  where  man  counts  most  by  reason  of  his  energy, 
enlightenment  or  capital  that  production  or  commerce 
are  greatest.  It  is  in  these  countries  that  man,  dominat- 
ing nature,  creates  not  alone  agricultural  wealth,  of  which 
the  products  suffice  or  contribute  to  maintain  a  dense  pop- 
ulation, but  creates  likewise  large  and  varied  manufactur- 
ing interests. 

Europe  and  the  United  States  of  America  are  where 
these  qualities  are  found  united  to  the  highest  degree. 
Commerce  carries  to  these  countries  from  all  other  coun- 
tries raw  material  which  their  industries  use  and  a  comple- 
ment of  foodstuffs  for  consumption  by  their  numerous 
and  relatively  rich  inhabitants,  while  manufactured  prod- 
ucts are  exported  in  exchange.  There  is  thus  formed 
throughout  the  world  regular  currents  of  wealth  circu- 
lation. In  this  the  most  civilized  countries  play  a  double 
role :  the  role  of  laboratories  where  the  material,  produced 
or  mined  in  all  parts  of  the  world,  is  transformed  by  in- 
dustry into  products,  i.  e.,  into  divers  utilities  for  the  serv- 
ice of  men  and  for  the  benefit  of  the  manufacturing  na- 
tion, and  the  role  of  a  pump  sucking  in  raw  materials  and 
ejecting  finished  products. 

Owing  to  the  extent  of  its  territory,  the  variety  of  its 
climate,  the  quality  of  its  soil,  and  its  mineral  wealth,  the 
United  States  enjoys  an  advantage  over  the  central  and 
western  European  states ;  it  produces  the  greater  portion 
of  its  own  foodstuffs  and  raw  material,  and  exports  both 
these  products  as  well  as  manufactures  to  Europe. 


The  Circulation  of  Wealth  263 

It  is  the  industrial  and  rich  nations  which  dominate 
this  movement.  They  export  the  most,  import  the  most, 
and,  precisely  by  reason  of  this  wealth,  buy  of  other  na- 
tions not  only  a  quantity  of  raw  material  and  foodstuffs, 
but  also  a  large  quantity  of  manufactured  products,  not- 
withstanding the  fact  that  they  themselves  manufacture 
so  much.  The  industrial  countries  strive  to  place  their 
products  on  foreign  markets ;  thence  a  competition  which 
stimulates  the  spirit  of  invention  and  enterprise  and  favors 
free  commercial  intercourse.  The  processes  of  the  great 
industries  to-day  rest  upon  science,  and  as  the  discoveries 
of  science  are  liberally  communicated  now  amongst  all 
civilized  peoples,  there  are  less  secrets  in  industry  than 
formerly.  The  machine  having  replaced  the  hand  tool, 
manual  dexterity  counts  for  less  and  the  advantage  which 
certain  groups  of  people  formerly  derived  from  it  has  di- 
minished. Again,  transportation  of  raw  materials  hav- 
ing become  less  costly,  the  advantages  of  situation  counts 
for  less.  Accordingly  any  nation  which  has  enterprising 
men  and  capital  and  means  of  communication,  may  hope 
to  establish  manufactories  capable  of  supplying  the  home 
market,  and  of  entering  the  lists  with  other  nations  in 
foreign  markets.  This  is  why,  despite  the  rapid  increase 
in  the  division  of  labor  with  economic  progress,  the  in- 
dustrial nations  each  tend  to  form  a  complete  group  by 
the  variety  of  their  manufacturing  industries.  Although 
this  new  condition  sometimes  renders  more  difficult  the 
importation  of  manufactured  products  on  the  part  of  the 
best  equipped  nations,  and  intensifies  the  general  compe- 
tition on  the  world's  markets,  it  manifestly  indicates  a 
general  growth  of  human  activity  and  of  wealth. 

102.  The  Role  of  Commerce  in  Civilization. — Logic- 
ally, commerce  is  secondary  and   derivative;  it  follows 


264  Elements  of  Political  Economy 

production  which  it  presupposes.  Historically,  com- 
merce is  as  old  as  primitive  society,  and  is  one  of  the  iirst 
bonds  which  united  men  into  social  groups.  It  cannot  be 
asserted  positively  that  the  commercial  contact  of  a  bar- 
barous and  a  polished  people  is  always  advantageous  to 
the  former.  The  barbarian  may  be  incapable  of  making 
use  of  the  instruments  of  labor  which  civilization  offers 
him,  and  he  is  always  susceptible  of  being  corrupted  by 
the  indulgences  it  offers.  That  is  what  happened  in  the 
case  of  the  North  American  Indian, 

But  it  may  be  said  that  among  civilized  nations  as  a 
rule,  commerce  exercises  a  favorable  influence  upon  wealth 
and  progress. 

The  following  spirited  utterance  of  an  English  orator 
is  intended  to  show  how  false  the  idea  of  isolating  a  na- 
tion, no  matter  how  fully  its  industries  may  be  developed. 

Pointing  to  the  landed  proprietor  whose  constant  cry 
is  for  economic  independence  of  the  stranger,  he  asks, 
what  the  career  of  this  man  is  and  exclaims,  "Why,  a 
French  cook  dresses  his  dinner  for  him,  and  a  Swiss  valet 
dresses  him  for  dinner;  he  hands  down  his  lady,  decked 
with  pearls  that  never  grew  in  the  shell  of  a  British  oyster; 
and  her  waving  plume  of  ostrich  feathers  certainly  never 
formed  the  tail  of  a  barn  yard  fowl.  The  viands  of  his 
table  are  from  all  countries  of  the  world,  his  wines  are 
from  the  banks  of  the  Rhine  and  the  Rhone.  In  his  con- 
servatory he  regales  his  sight  with  the  blossoms  of  South 
American  flowers.  In  his  smoking-room  he  gratifies  his 
scent  with  the  weed  of  North  America.  His  favorite 
horse  is  of  Arabian  blood ;  his  pet  dog  of  the  St.  Bernard's 
breed.  His  gallery  is  rich  with  pictures  from  the  Flem- 
ish school,  and  statues  from  Greece.  For  his  amusements 
he  goes  to  hear  Italian  singers  warble  German  music,  fol- 


The  Circulation  of  Wealth  265 

lowed  by  a  French  ballet.  If  he  rises  to  judicial  honors 
the  ermine  which  decorates  his  shoulders  is  a  production 
that  was  never  before  on  the  back  of  a  British  beast.  His 
very  mind  is  not  English  in  its  attainments;  it  is  a  mere 
picnic  of  foreign  contributions.  His  poetry  and  philos- 
ophy are  from  Greece  and  Rome;  his  geometry  is  from 
Alexandria;  his  arithmetic  is  from  Arabia;  and  his  re- 
ligion from  Palestine.  In  his  cradle  in  his  infancy  he 
rubbed  his  gums  with  coral  from  Oriental  oceans;  and 
when  he  dies  his  monument  will  be  sculptured  in  marble 
from  the  quarries  of  Carara.  And  yet  this  is  the  man  who 
says,  *0h !  let  us  be  independent  of  foreigners !'  " 

The  American  may  experience  the  same  conditions  in 
his  own  country  and  without  going  outside  of  the  most 
modest  social  circles.  The  Chicago  workman  before  start- 
ing for  his  shop,  takes  his  coffee  grown  in  Brazil,  sweet- 
ened with  sugar  from  Cuba.  The  wool  of  which  his 
clothes  are  made  may  have  come  from  Australia  and  he 
pulls  on  a  pair  of  boots  made  from  hides  which  the  Argen- 
tine has  supplied. 

To  sum  up  the  advantages  of  commerce  to  men;  ist. 
Commerce,  by  transporting  each  article  exactly  where  it 
is  most  sought,  increases,  by  that  fact  alone,  the  sum  of 
utilities. 

2nd.  Commerce  is  necessary  to  a  division  of  labor. 
It  renders  it  easier  and,  so  to  speak,  more  specialized  ac- 
cording as  it  itself  becomes  more  varied,  and,  by  supplying 
to  manufacturing  countries  raw  material,  gives  rise  to 
numerous  industries  in  such  countries. 

3rd.  It  increases  economic  activity,  not  only  by  the 
industries  which  it  leads  men  to  establish,  but  by  the  new 
enjoyments  it  offers  and  by  the  very  needs  which  it 
creates. 


266  Elements  of  Political  Economy 

4th.  By  establishing  closer  relations  and  more  fre- 
quent communication  between  different  countries,  it  leads 
people  to  know  each  other  and  to  enlighten  each  other. 

5th.  By  stimulating  exploration  and  discovery  by 
sea  and  land,  it  gives  men  a  better  knowledge  of  the  planet 
they  inhabit.  It  was  the  spirit  of  commerce  that  led  to 
the  discovery  of  the  passage  to  India  via  the  Cape  of  Good 
Hope. 

6th.  By  giving  men  a  knowledge  of  the  earth  it  in- 
vites them  to  colonize  regions  whence  come  and  whither 
go  exchangeable  products. 

7th.  By  multiplying  the  ties  which  unite  people  and 
weakening  the  prejudices  which  serve  to  estrange  them, 
commerce,  which  has  often  been  the  cause  of  war,  tends 
nevertheless  to  render  war  less  frequent  in  consequence  of 
introducing  a  juster  view  of  the  interests  of  all. 

Resume 

Commerce  is  buying  and  selling,  i.  e.,  the  exchange  of 
merchandise  for  merchandise,  or  of  merchandise  for 
money.  Its  object  is  to  carry  products,  often  from  one 
place  to  another,  or  from  one  period  of  time  to  another, 
and  always  to  transfer  them  from  one  owner  to  another. 

Although  they  do  not  create  products,  merchants  are 
producers  because  they  create  utilities. 

We  distinguish  home  commerce  which  is  generally 
free,  from  foreign  commerce  which  is  subject  to  statu- 
tory regulations.  Foreign  commerce  embraces  imports 
and  exports,  general  commerce  and  special  commerce,  and 
transit  through  the  country  to  a  foreign  port.  A  nation's 
exports  approximate  its  imports. 

Taxes  on  exports  are  rare.     Taxes  on  imports  are 


The  Circulation  of  Wealth  267 

fixed  according  to  either  the  Hberal  or  the  restrictive 
system. 

Exchange  is  the  price  at  one  place  of  a  definite  quan- 
tity of  specie  dehverable  elsewhere.  It  is  favorable  to 
the  creditor  nation,  unfavorable  to  the  debtor  nation. 
Exchange  is  a  barometer  of  the  condition  of  commerce : 
but  we  must  not  confide  too  much  in  it. 

Crises  are  a  diminution  of  production,  of  consumption, 
or  of  circulation  of  wealth,  and  a  rupture  of  the  equilib- 
rium between  these  dififerent  branches  of  economic  ac- 
tivity. 

A  crisis  is  characterized  first  by  an  increase  in  the  cir- 
culation of  banknotes,  by  the  falling  ofif  in  the  bank  re- 
serves, by  the  increase  of  discounts.  It  is  preceded  by  a 
tendency  toward  a  higher  level  of  prices  and  followed  by 
a  fall  in  prices  and  an  apathy  in  business  more  or  less  pro- 
longed until  the  liquidation  is  complete. 

Crises,  commercial  or  other,  are  a  sort  of  periodical 
malady  inherent  in  our  economic  organization.  It  is  in 
countries  where  men  count  for  most  because  of  energy, 
instruction  and  capital  that  production  and  commerce  are 
greatest ;  in  such  countries  is  found  a  dense  population,  and 
large  and  varied  manufactures.  Nations  in  which  indus- 
try is  most  highly  developed  import  principally  raw  ma- 
terials and  foodstuffs,  and  export  manufactured  products. 
Industrial  nations  each  tend  to  form  a  complete  industrial 
group. 

It  may  be  said  that  as  a  general  rule,  commerce  exer- 
cises a  favorable  influence  upon  wealth  and  civilization. 
It  increases  the  sum  of  utilities;  it  augments  economic 
activity,  it  teaches  people  to  know  each  other  and  to  know 
the  earth ;  it  stimulates  colonization  and  renders  wars  less 
frequent. 


PART  IV 

CONSUMPTION 

103.  The  Various  Kinds  of  Consumption.  104.  Productive  Con- 
sumption. 105.  Outlays  for  Capital  and  Education.  106.  The  Con- 
sumption of  Capital  by  Labor  and  Production.  107.  Unproductive 
Consumption.  108.  Luxuries.  109.  Preservative  Consumption,  no. 
The  Mechanism  of  Insurance,     in.  Different  Forms  of  Insurance. 

103.  The  Various  Kinds  of  Consumption. — We  know 
that  consumption  is  the  legitimate  end  of  wealth  (see  5 
and  6).  If  men  take  the  trouble  to  produce,  conserve  and 
exchange  wealth,  it  is  because  they  expect  to  find  in  it  a 
means  of  gratifying  their  wants.  Now,  wants,  as  we 
have  explained,  are  the  determining  cause  of  economic 
effort,  and  consumption  which  satisfies  the  want  is  the 
recompense  for  effort. 

Nevertheless,  it  is  not  necessary  that  all  the  wealth 
produced  should  be  immediately  consumed.  A  portion 
of  it  is  saved  in  order  to  be  consumed  later,  and  especially 
to  create  capital  (21  and  22).  Nor  is  it  at  all  necessary 
that  all  consumption  should  aim  at,  or  result  in,  satis- 
faction of  personal  wants,  nor  even  that  all  the  wealth 
consumed  should  satisfy  wants  at  all. 

Man  creates  neither  matter  nor  physical  energy.  No 
more  can  he  destroy  matter  or  physical  energy.  He  cre- 
ates simply  utilities,  that  is,  some  utility  which  he  again 
destroys  by  consuming  wealth  (7  and  11). 

Primarily  we  may  divide  consumption  into  two  great 

classes,  vis.:  productive  and  unproductive  consumption. 

The  first  class  includes  all  consumption  made  with  a  view 

268 


Consumption  269 

to  production,  or,  more  precisely,  with  a  view  to  creating 
or  conserving  some  utility  in  the  form  of  either  a  product, 
service  or  productive  force.  The  second  embraces  other 
kinds  of  consumption,  i.  e.,  all  which  have  no  industrial 
aim,  but  either  satisfy  personal  wants  or  are  due  to  acci- 
dent. 

We  may  likewise  distinguish  between  rapid  and  slow 
consumption  of  wealth  according  to  the  duration  of  the 
service  and  the  time  which  intervenes  between  the  initial 
employ  and  final  destruction  of  the  utility. 

Personal  services  fall  under  the  head  of  rapid  con- 
sumption. Foodstuffs  and  fuel  likewise  belong  under  this 
head.  Under  the  second  head  come  monuments  and 
buildings  which  may  serve  the  same  use  for  many  years 
or  even  centuries,  machines  and  tools  which  serve  for  a 
longer  or  shorter  period  the  purposes  of  production,  and 
books  which  we  keep  in  our  libraries. 

This  distinction  is  important,  particularly  in  industrial 
consumption  where  each  product  should  contain  the  whole 
value  of  all  the  several  forms  of  rapid  consumption  em- 
ployed in  its  fabrication  while  including  only  the  frac- 
tional recovery,  or  amortizement,  of  the  forms  of  slow 
consumption  employed. 

We  may  distinguish  between  consumption  of  revenue 
and  consumption  of  capital.  The  latter  is  most  frequently 
reproductive  consumption. 

Whether  rapid  or  slow,  consumption  always  implies  a 
destruction  of  utility;  all  wealth,  except  lands,  is  con- 
sumed and  comes  to  an  end.  The  most  solidly  con- 
structed monuments  of  antiquity  are  ruins  to-day  and 
those  of  the  Middle  Ages  which  still  exist  could  not  have 
preserved  their  usefulness  except  by  important  outlays 
for  maintenance. 


270  Elements  of  Political  Economy 

We  may  likewise  distinguish  between  private  and  pub- 
lic consumption,  the  first  embracing  all  that  individuals 
and  groups  of  individuals  consume,  the  second  all  that  is 
consumed  in  the  public  service,  that  is,  in  the  disburse- 
ments of  the  political  community. 

Consumption,  in  the  economic  sense,  often  takes  place 
much  sooner  than  the  ordinary  sense  of  the  word  might 
lead  us  to  suppose.  Take,  for  example,  bread  and  butter. 
Everbody  knows  that  consumption  will  not  be  long  in 
absorbing  this  food,  that  the  same  evening  probably  the 
bread  will  cease  to  exist,  and,  after  a  few  days,  the  butter 
also. 

But  take  the  planks  in  a  carpenter  shop.  How  and 
where  will  they  be  consumed?  When  they  have  ceased 
to  be  planks  in  order  to  become  tables  and  chairs.  Take 
the  cotton  in  the  factory.  Will  it  be  consumed  only  when 
the  cloth  which  is  made  of  it  is  used  and  worn  out  ?  Long 
before  that;  for  it  ceases  to  be  cotton  when  the  spinner 
has  converted  it  into  yarn,  as  the  yarn  ceases  to  be  yarn 
when  the  weaver  has  converted  it  into  cloth,  and  the  cloth 
ceases  to  be  cloth  when  the  garment  worker  has  converted 
it  into  garments.  Most  products,  except  land,  are  con- 
tinually destroyed  or  used  up  or  transformed  by  incessant 
consumption. 

104.  Reproductive  Consumption. — When  the  farmer 
sows  wheat  he  consumes  it.  He  consumes  besides  the 
labor  employed  in  the  sowing  and  in  preparing  the  soil, 
the  interest  on  his  capital  for  nine  months,  and  presently 
he  will  consume  the  labor  of  the  harvesters.  All  these 
forms  of  consumption  are  but  advances  made  to  produc- 
tion. If  his  operations  have  been  good  he  will  recover 
the  whole  of  his  outlay  in  the  harvest.     Seed  and  labor 


Consumption  271 

will  have  been,  not  destroyed,  but  transformed  into  grain 
and  straw. 

When  a  manufacturer  builds  and  equips  a  shop  at  a 
great  outlay  in  order  to  produce  machines,  he  consumes 
a  considerable  amount  of  capital  which  there  is  no  reason 
to  believe  he  will  recover  in  the  price  of  the  first  engine 
that  comes  from  his  shop;  for  here,  as  we  have  said,  is 
fixed  capital.  In  the  price  of  the  engine  he  will  recover 
the  whole  value  of  the  metal,  of  the  labor  and  of  the  fuel 
consumed  in  its  construction,  and  he  will  recover,  besides, 
a  small  portion  of  the  fixed  capital  invested  in  the  estab- 
lishment. The  same  will  be  true  of  each  piece  he  con- 
structs, and  in  a  dozen  years  perhaps,  if  he  has  managed 
well,  he  will  have  recovered  in  the  form  of  this  gradual 
repayment  or  amortizement  the  whole  of  the  fixed  capital. 
Here  again,  we  have  simply  a  transformation,  a  group  of 
utilities  which  change  their  form,  ordinarily  serving  to 
create  greater  utilities.  These  transformations  are  styled 
reproductive  consumption  because  in  fact  we  destroy  cer- 
tain utilities  only  to  produce  directly  a  sum  of  utilities  at 
least  equivalent.  They  are  really  advances  made  to  pro- 
duction (see  23). 

Of  the  various  forms  of  reproductive  consumption 
called  for  by  agricultural  or  manufacturing  industries, 
some  are  rapid,  others  slow.  The  former  is  consumption 
of  circulating  capital,  the  latter  of  fixed  capital. 

105.  The  Outlay  for  Capital  and  Education. — Most 
industries  gradually  use  and  conserve  their  fixed  capital. 
This  capital  merits  special  consideration  in  the  study  of 
consumption.  It  had  to  be  created  and  maintained :  it  is 
useful  to  increase  it.  At  the  moment  it  is  created,  there 
is  a  consumption  of  circulating  capital  which  is  trans- 
formed into  fixed  capital.     Here  it  is  important  to  ob- 


2^2.  Elements  of  Political  Economy 

serve  that  the  manufacturer  who  puts  fixed  capital  into 
his  estabHshment  pays  out  money  for  it ;  but  money  only 
circulates ;  it  is  products,  wood,  metals,  etc.,  bought  with 
that  money  which  are  consumed.  The  use  of  money  is 
not  even  always  necessary :  an  example  is  offered  by  the 
carpenter  using  planks  which  he  has  in  his  shop  to  con- 
struct a  shed  for  his  own  use. 

We  have  pointed  out  in  treating  of  saving  and  capital 
(see  23  and  24)  how  consumption,  made  with  a  view  to 
the  creation  or  increase  of  capital,  serves  to  increase 
wealth.  One  or  two  examples  will  suffice  to  show  how 
outlays  for  maintenance  are  no  less  important.  A  farmer 
who  abstains  from  the  use  of  fertilizers  on  account  of 
their  expense,  may,  in  despite  of  the  modest  harvest  he 
reaps,  find  himself  with  more  money  in  his  pocket  at  the 
end  of  the  year  than  if  he  had  incurred  the  expense  in  ques- 
tion. But  the  following  year  his  shortsightedness  will 
become  apparent  in  the  impoverishment  of  the  soil.  The 
owner  of  a  horse  may  make  the  animal  work  one  or  two 
days  without  feed :  he  may  flatter  himself  that  he  has 
saved  the  cost  of  the  corn  and  hay ;  but,  the  fourth  day,  the 
horse  would  die  and  the  miser  would  lose  all  his  capital 
because  he  failed  to  make  the  necessary  outlay  for  main- 
tenance. No  one  is  so  stupid  as  to  do  this,  but  there  are 
people  who,  because  they  nourish  their  horses  insuffi- 
ciently, get  inadequate  service  from  them. 

We  know  that  intellectual  capital  is  still  more  pre- 
cious than  material  capital  (see  16,  18,  19,  20).  It  is  like- 
wise by  consuming  wealth  that  we  create  intellectual  capi- 
tal, maintain  it,  increase  it;  and  it  is  the  more  important 
to  do  this  accordingly  as  intellectual  capital  is  the  more 
useful  to  civilization.  A  nation  may  save  the  enormous 
sums  which  it  pays  out  for  education,  primary,  secondary 


Consumption  273 

and  higher,  and  after  having  closed  all  the  schools,  believe 
itself  richer  for  a  certain  period  because  it  has  more  avail- 
able capital.  But  the  moment  of  disillusion  will  be  cruel 
indeed.  In  twenty  years  a  large  portion  of  its  intellectual 
capital  will  have  been  destroyed  for  lack  of  transmission 
and  the  nation  would  be  relegated  to  an  inferior  position. 
The  only  way  in  which  to  increase  capital  is  to  continue 
to  create  it;  and  there  are  but  two  kinds  of  consumption 
applied  to  material  capital,  viz. :  creation  and  maintenance. 
Just  so  with  intellectual  capital,  which  the  labor  of  savants 
and  thinkers  creates  and  instruction  spreads  and  transmits. 
By  way  of  summary  we  may  say  that  reproductive 
consumption : 

!The  cost  of  production  or  crea- 
tion  of  wealth. 
Ine   capitalizing  or  increase  01 
material  productive  forces, 
f  The  cost  of  supporting  the  pro- 
I      ducers    or   the  sustenance   of 

Applied  to  persons,  embraces  :  -{  _  human  life. 

I  h-ducation    or    the    increase   of 
[     moral  productive  forces. 

106.  The  Destruction  of  Capital  in  the  Work  of  Pro- 
duction.— It  is  the  nature  of  capital  to  be  active  because 
it  is  productive  only  when  employed  (see  23).  And  it 
engages  in  the  work  to  be  consumed  in  it.  The  near  and 
certain  fact  is  consumption.  The  aim  is  reproduction, 
i.  e.,  regeneration  in  a  new  form  and  with  an  added  value. 
But  this  end  is  more  or  less  distant  and  the  entrepreneur 
is  never  quite  certain  of  attaining  it.  All  capital  is  like 
the  seed  which  one  consigns  to  the  ground;  it  is  lost  if 
there  be  no  harvest. 

A  manufacturer  has  employees  who  work  badly,  a  poor 
installation  or  inadequate  tools ;  each  unit  of  product  costs 
him  ten  dollars  and  it  is  worth  but  nine  dollars  on  the 
market.     If  his  total  production  for  the  year  amounts  to 


2/4  Elements  of  Political  Economy 

100,000  dollars  it  means  10,000  dollars  of  capital  con- 
sumed as  a  pure  loss.  He  attempts  a  consumption  which 
he  intends  shall  be  reproductive,  but  which  proves  unpro- 
ductive. 

A  tradesman  establishes  himself  in  a  certain  street. 
Customers  are  lacking  but  he  nevertheless  persists  in  the 
undertaking  until  he  is  obliged  to  close  his  shop  after  hav- 
ing consumed  several  thousand  dollars  which  he  had  ac- 
cumulated previously,  or  borrowed.  Here  again  we  have 
consumption  intended  to  be  reproductive  but  which  has  de- 
generated into  unproductive  consumption. 

In  the  United  States  the  failures  in  business  which 
took  the  form  of  assignments  for  the  benefit  of  creditors 
for  the  four  years  190 1-4  show  an  average  annual  excess 
of  liabilities  over  assets  of  more  than  65  million  dollars, 
and  to  this  sum  must  be  added  the  loss  of  the  capital  in- 
vested in  the  enterprises.  Moreover  such  failures  repre- 
sent but  the  smaller  portion  of  the  industrial  losses  occa- 
sioned each  year  by  agricultural,  industrial  or  commercial 
operations  which  unfavorable  circumstances  or  had  man- 
agement render  unprofitable. 

Capital  is,  so  to  speak,  constantly  on  the  field  of  battle 
struggling  for  the  conquest  of  wealth.  There  are  casu- 
alties, but  wealth  is  conquered  none  the  less,  or,  to  speak 
more  correctly,  is  created  by  an  enormous  quantity  of  ef- 
fort under  which  some  of  the  combatants  succumb. 

These  losses  must  not  discourage  nor  alarm  us  unduly. 
The  important  thing  is  to  be  careful,  intelligent  and  eco- 
nomical, with  a  view  to  avoiding  them.  On  the  other 
hand  we  must  not  forget  that  no  business  ventures  are 
free  from  risk  and  from  occasional  loss.  The  enrichment 
of  a  nation  is  found  in  the  difference  between  the  amount 
of  services  of  all  kinds  consumed  in  any  manner  whatso- 


Consumption  2ys 

ever  and  the  sum  of  services  produced  in  the  same  time. 
The  timid  nation  which,  for  fear  of  loss,  refrains  from  em- 
ploying much  of  its  wealth  in  production,  enriches  itself 
less  rapidly  than  the  enterprising  nation  which  increases 
the  employment  of  capital  and  in  which  the  successful 
ventures  due  to  its  intelligent  activity  greatly  exceed  the 
losses  due  to  rashness.  Here  again  we  have  a  trait  which 
manifests  the  superiority  of  the  moral  forces  over  the  ma- 
terial. 

When  we  speak  of  industrial  losses  we  do  not  include 
the  fall  in  market  value  of  merchandise  or  securities  which 
is  a  phenomenon  of  a  different  order.  Variation  in  val- 
ues and  variation  in  the  quantity  of  products  are  two  dif- 
ferent things,  although  intimately  connected.  It  is  al- 
ways desirable  that  the  quantity  of  products  should  in- 
crease; it  is  not  always  desirable  that  prices  should  in- 
crease (see  75). 

107.  Other  Kinds  of  Unproductive  Consumption. — 
All  consumption  which  is  not  reproductive  is  termed  un- 
productive. There  are  two  distinct  kinds  of  unproduc- 
tive consumption,  involuntary  and  voluntary. 

The  industrial  loss  resulting  from  an  enterprise  badly 
conceived  or  conducted  is  an  example  of  involuntary  un- 
productive consumption. 

Another  is  the  accidental  loss  occasioned  by  some  for- 
tuitous event  such  as  the  wreck  of  a  ship  or  destruction 
of  a  harvest  by  the  elements.  These  are  blows  which  can- 
not be  foreseen  with  respect  to  each  particular  happening, 
but  against  the  disastrous  effects  of  which  individuals,  as 
we  shall  point  out  further  on,  may  often  protect  them- 
selves by  insurance. 

Nevertheless,  even  in  the  case  of  accidental  losses, 
human  energy  is  not  entirely  impotent ;  for  many  fatalities 


276  Elements  of  Political  Economy 

are  due  primarily  to  inefficiency,  ignorance  or  carelessness. 
If  the  pilot  had  known  the  location  of  the  reef  his  boat 
would  not  have  been  wrecked;  if  the  farmer  had  roofed 
his  barns  with  less  inflammable  material  and  left  more 
space  between  them,  they  would  not  all  have  been  burned. 
Just  so  in  the  case  of  industrial  losses.  If  the  owner  of  the 
thread  mill  had  comprehended  the  value  of  certain  new  in- 
ventions, he  would  have  discarded  his  old  machinery  and 
not  persisted  in  manufacturing  thread  which  cost  more  to 
produce  than  he  could  obtain  for  it.  If  the  merchant  had 
had  a  better  knowledge  of  commercial  geography  and  the 
state  of  the  market,  he  would  not  have  sent  to  a  distant 
port  merchandise  which  in  all  probability  would  have  to 
be  sold  at  a  loss  there.  The  amount  of  capital  which  is 
engulfed  each  year  in  involuntary  unproductive  consump- 
tion, especially  industrial  consumption,  is  enormous. 
How  much  of  it  would  not  professional  training,  or  more 
foresight  and  experience,  have  saved ! 

By  voluntary  unproductive  consumption  we  mean  all 
that  individuals  and  society  consume  to  satisfy  wants  other 
than  those  of  production,  or  maintenance,  or  the  develop- 
ment of  productive  force.  Such  consumption  divides  it- 
self into  outlay  for  the  maintenance  of  non-producers  and 
for  expenditures  for  luxury,  private  or  public. 

Under  the  head  of  outlay  for  the  maintenance  of  non- 
producers  we  do  not  include  the  expenses  of  families  who 
are  supported  by  the  efforts  of  one  of  the  members,  but 
persons  who  live  upon  their  income  or  pension  or  by  char- 
ity. Consumption  for  luxury  we  may  designate  as  all 
consumption  not  useful  for  the  support  of  a  person. 

108.  Luxury. — It  is  easier  to  define  luxury  in  a  gen- 
eral way  than  to  designate  the  point  where  luxury  begins 
in  individual  consumption.     A  merchant  has  a  coachman 


Consumption  277 

and  a  valet.  Is  this  a  luxury?  We  dare  not  say  off- 
hand that  such  is  the  case.  For  these  two  servants  who 
in  many  respects  constitute  a  personal  indulgence  permit 
him  to  occupy  himself  more  exclusively  with  his  affairs. 
Another  person  does  not  keep  a  carriage,  but  frequently 
pays  out  money  to  hire  one.  Is  this  a  luxury  ?  Not  nec- 
essarily, for  it  may  facilitate  his  business.  On  Sunday 
he  hires  a  carriage  for  a  ride  in  the  park.  Is  that  a  lux- 
ury ?  Yes,  but  if  it  does  not  appear  to  exceed  his  means 
it  is  a  form  of  comfort  to  which  his  labor  and  economies 
entitle  him. 

Luxuries  are  accordingly  not  in  themselves  reprehen- 
sible; they  constitute  a  legitimate  satisfaction  so  long  as 
they  are  not  excessive,  i.  e.,  the  amount  of  luxury  in  which 
each  individual  can  indulge  is  variable,  depending  upon 
his  income.  By  income  is  meant  the  sum,  the  fruit  of 
labor  or  interest  on  capital,  which  each  one  has  at  his  dis- 
posal for  the  satisfaction  of  personal  or  family  needs. 

Everyone  should  divide  his  income  into  tzuo  parts:  the 
first  to  be  devoted  to  necessaries  and  adequate  savings,  the 
second  to  be  available  for  luxuries.  To  abandon  one's  self 
to  the  latter  without  adequate  means  of  meeting  the  de- 
mands of  the  former  is  ruinous.  But  when  the  demands 
of  the  former  are  fully  satisfied  it  is  legitimate  to  indulge 
in  luxuries ;  it  is  in  fact  an  increase  of  well-being,  a  broad- 
ening of  life. 

Since  production  takes  place  with  a  view  to  satisfying 
human  needs,  it  is  at  meeting  the  needs  of  maintenance 
and  the  demands  of  luxury  that  wealth  principally  aims. 
Reproductive  consumption,  however  important,  is  a  means 
and  not  an  end;  it  prepares  products  to  be  finally  con- 
sumed for  the  support  and  entertainment  of  the  race.     In 


278  Elements  of  Political  Economy 

economic  activity  everything  proceeds  from  man  and  ends 
in  man. 

There  is  however  a  common  prejudice  by  which  we 
must  not  permit  ourselves  to  be  deceived.  It  is  frequently 
said  that  "luxury  promotes  trade."  The  maxim  is  false. 
The  taste  for  luxuries  may  really  stimulate  productive  ac- 
tivity by  stimulating  the  desire  to  grow  rich  in  order  to 
satisfy  fancies.  But,  since  products  are  continually  mov- 
ing, continually  destroyed  and  re-created,  except  in  the 
very  rare  case  of  the  miser  hoarding  his  treasure,  it  is  evi- 
dent that  if  the  owner  of  the  wealth  had  not  used  his 
money  for  luxury  he  would  have  used  it  in  reproduction, 
either  personally  if  he  be  engaged  in  business,  or  by  lend- 
ing it  if  he  be  a  capitalist.  The  nature  of  the  thing  con- 
sumed may  thus  fail  to  exercise  a  favorable  influence  on 
the  amount  of  labor  at  command. 

In  spending  his  income  on  luxuries,  the  owner  has 
simply  exercised  his  right.  The  income  being  a  product 
and  not  a  productive  force,  the  sum  of  the  productive 
forces  of  the  nation  remains  the  same.  If,  however,  he 
had  devoted  a  portion  of  his  income  to  reproductive  con- 
sumption, that  much  would  have  been  added  to  existing 
capital  instead  of  being  destroyed,  and  the  reproductive 
force  of  the  nation  as  well  as  the  general  command  of 
labor,  would  have  increased  to  that  extent. 

Seriously  prejudicial  is,  of  course,  the  luxury  which 
involves  prodigality,  indulgence  which,  not  content  with 
the  expenditure  of  income,  eats  into  capital.  Such  in- 
dulgence has  the  same  effect  as  the  stupidity  of  the  savage 
who  fells  a  tree  in  order  to  secure  the  fruit.  It  destroys 
a  portion  of  the  productive  forces  of  society  and  impov- 
erishes the  nation. 

Indulgence  in  luxury  is  natural  to  men.     It  is  found 


Consumption  279 

in  all  times  and  countries,  as  well  as  in  all  social  classes, 
from  the  savage  who  has  no  capital  other  than  his  bow  and 
his  hut  constructed  of  branches,  but  who  adorns  himself 
with  feathers,  from  the  working  women  who  to-day  wear 
silks  whilst  their  mothers  wore  cotton,  up  to  the  million- 
aire who  decorates  his  home  with  masterpieces  of  paint- 
ing and  sculpture.  The  growth  of  consumption  of  lux- 
uries, public  and  private,  is  legitimate  in  a  society  whose 
wealth  is  growing. 

Luxury  may  take  diverse  forms  according  to  the  hab- 
its of  a  people  or  the  taste  of  individuals.  It  may  be 
coarse,  such  as  overindulgence  in  the  pleasures  of  the  table. 
It  may  be  refined  and  take  pleasure  in  elegance  of  dress  or 
furniture.  It  may  be  delicate  and  love  art.  The  more 
luxury  inclines  toward  spiritual  pleasures,  the  purer  it 
becomes  and  the  more  it  makes  for  progress.  There  is 
one  form  of  luxury  which  is  to  be  condemned  absolutely, 
even  when  it  does  not  exceed  the  income  of  the  person 
who  indulges  in  it,  namely,  luxury  by  which  men  become 
corrupt  or  corrupt  their  fellows.  Drunkenness  and  de- 
bauchery fall  under  this  head. 

Everybody  has  certain  moral  duties  which  ought  to 
translate  themselves  in  practice  into  economic  acts.  To 
work  is  one  of  these  duties.  To  make  a  proper  use  of 
one's  fortune  is  another.  He  who  possesses  wealth  must 
realize  that  he  has  in  his  hands  a  force  with  which  he  can 
produce  good  or  evil,  that  it  is  his  duty  to  seek  the  one  and 
avoid  the  other,  to  employ  a  portion  of  his  income  in  acts 
of  intelligent  benevolence,  to  so  direct  even  his  indulgences 
as  to  encourage  the  production  of  the  beautiful  and  to  help 
form  and  purify  the  tastes  of  his  fellow  citizens. 

109.  Preservative  Consumption. — Between  reproduc- 
tive and  unproductive  consumption  must  be  found  a  place 


28o  Elements  of  Political  Economy 

for  preservative  consumption.  In  its  results  it  is  allied  to 
reproductive  consumption  and  it  may  be  classed  with  out- 
lays for  the  maintenance  of  capital.  In  its  nature,  how- 
ever, it  differs  somewhat  from  both.  Maintenance 
consists  in  consuming  a  certain  amount  of  capital  in  order 
to  prevent  the  destruction  or  impairment  of  an  instrument 
of  production.  Preservative  consumption,  which  is  noth- 
ing other  than  insurance,  does  not  guarantee  capital 
against  destruction,  but  guarantees  the  owner  against  the 
loss  of  his  capital  in  the  event  of  his  capital  being  acci- 
dentally destroyed. 

Insurance  applies  only  to  losses  involuntary  and  acci- 
dental. When  wealth  is  destroyed — not  consumed  repro- 
ductively — no  power  can  cause  it  to  exist  again.  We  can 
produce  new  wealth,  but  cannot  re-create  that  which  has 
disappeared.  Accordingly  no  such  thing  as  insurance  is 
possible  for  society  considered  as  a  whole.  Society  has  no 
other  salve  for  accidental  losses  than  to  possess  a  volume 
of  wealth  and  productive  forces  which  will  render  small 
losses  less  sensible  in  the  great  mass  and  promptly  fill  up 
any  voids  that  may  be  created. 

But  insurance  against  individual  losses  is  possible,  and 
the  security  which  private  interests  find  in  it  is  eminently 
favorable  to  the  public  interest.  The  object  of  insurance 
most  frequently  is  to  guarantee  in  case  of  accidental  loss, 
the  replacing  of  the  capital  insured,  and  it  is  applied  to 
capital  which  by  its  nature  is  liable  to  accidental  de- 
struction. 

Sudden  destruction  of  capital  may  seriously  affect  an 
owner  or  ruin  him.  The  payment  of  a  small  annual  pre- 
mium, which  is  precisely  preservative  consumption,  gives 
to  him  a  guarantee  that  in  the  event  of  his  capital  being 
partly  or  wholly  destroyed  by  an  accident  covered  by  the 


Consumption  281 

insurance  policy,  an  equivalent  capital  will  be  given  to  him. 
no.  The  Mechanism  of  Insurance. — This  result  is 
secured  by  means  of  a  financial  combination  which  aims 
at  eliminating  the  element  of  risk  and  for  this  purpose 
resorts  to  association  and  division  of  risk.  Men  are  ex- 
posed to  many  dangers ;  but  accidents,  however  numerous, 
are  really  the  exception  in  human  affairs.  Not  all  the 
buildings  of  a  great  land  are  devoured  by  conflagration, 
not  every  man  breaks  a  leg  every  day,  not  all  the  living 
die  a  sudden  death.  Just  here  lies  the  possibility  of  divid- 
ing the  risk. 

Example. — A  merchant  has  100  tons  of  goods  which 
he  desires  to  transport  to  a  distant  country.  If  he  should 
put  the  100  tons  on  one  ship  and  the  ship  foundered,  he 
would  lose  the  whole  of  it.  Would  it  not  be  better  to 
intrust  one  ton  to  one  ship,  and  one  ton  to  another,  con- 
fiding it  thus  to  100  ships  if  he  could  find  so  many  sailing 
for  the  port  in  question?  If  he  should  do  this  he  would 
be  free  from  anxiety.  It  is  highly  probable,  we  may  say 
almost  certain,  that  not  all  the  100  vessels  will  be  ship- 
wrecked. On  the  other  hand  it  is  probable  that  at  least 
one  of  the  ships  will  be  lost,  so  that  the  merchant  to  avoid 
the  danger  of  losing  all  his  goods,  will  have  practically 
sacrificed  one-hundredth  part  of  them. 

But  this  way  of  dividing  the  risk  is  hardly  practicable. 
What  merchant  is  willing  to  go  to  the  trouble  and  expense 
of  making  out  the  papers  for  the  one  hundred  separate 
shipments  even  if  he  could  find  100  ships  sailing  within  a 
reasonable  period  for  the  desired  port  ?  This  division  of 
risk  is  arrived  at  indirectly  by  an  association  whose  opera- 
tions are  based  on  a  calculation  of  probabilities. 

We  have  supposed  that  one  ship  in  one  hundred  on  the 
average  is  lost.     The  merchant  finds  an  insurer  who  says 


282  Elements  of  Political  Economy 

to  him :  "There  are  ninety-nine  chances  that  the  ship 
which  carries  your  100  tons  will  arrive  safely  and  one 
chance  that  it  will  be  lost.  Pay  me  one-hundredth  part  of 
the  value  of  your  shipment  and  I  will  insure  it.  The 
chances  are  equal.  It  is  true  that  I  shall  run  the  risk  of 
being  compelled  to  pay  you  ninety-nine  times  as  much  as 
you  have  paid  me,  but  I  have  ninety-nine  chances  of  hav- 
ing nothing  to  pay.  You  on  your  part  enjoy  the  certainty 
of  receiving  from  me  the  full  value  of  the  shipment  if  the 
vessel  should  be  lost." 

Of  a  large  number  of  houses  the  percentage  destroyed 
by  fire  each  year  is  tolerably  uniform.  You  wish  to  insure 
yours :  then  pay  the  insurer  such  percentage  of  its  value 
each  year.     This  is  the  principle  on  which  insurance  rests. 

Insurance  has  been  compared  to  hazardous  speculation. 
Such  a  view  is  not  correct.  Insurance  is  precisely  the 
destroyer  of  risk.  The  insured  purchases  his  safety;  he 
surrenders  a  certain  portion  of  the  income  of  his  capital 
in  order  to  be  sure  of  the  continued  enjoyment  of  the  cap- 
ital itself. 

In  the  event  of  a  loss  the  insurance  company  on  its 
part  pays  out  money  which  it  has  received  as  premiums 
for  this  very  purpose,  regulating  its  chances  so  as  to  enjoy 
a  profit  over  and  above  the  average  risk. 

For  a  sound  company  two  things  are  necessary  :  a  large 
number  of  risks  and  a  capital  sufficiently  large  to  enable 
it  to  meet  unforeseen  contingencies.  If  a  company,  know- 
ing that  the  average  loss  of  vessels  is  one  in  one  hundred, 
should  limit  its  operation  to  insuring  one  hundred  vessels, 
demanding  of  each  the  one-hundredth  part  of  its  value, 
its  operations  might  prove  very  unprofitable.  A  storm 
might  destroy  three  or  four  out  of  the  100  vessels  the 
company  insured.     If  instead  of  insuring  100  it  insured 


Consumption  283 

1,000,  the  chances  of  suffering-  only  the  general  average 
of  loss  (namely  i  in  100)  would  be  increased  not  in  the 
proportion  of  i  to  10,  but  of  i  to  100,  that  is  to  say,  they 
increase  as  the  square  of  the  increase  in  the  number  of  the 
insured.  Accordingly  when  insurance  is  based  upon  very 
large  numbers,  a  company's  operations  are  quite  removed 
from  the  domain  of  hazard. 

III.  Leading  Kinds  of  Insurance. — The  oldest  form 
of  insurance  is  maritime  insurance.  It  is  the  first  which 
men  devised,  as  manifestly  no  form  of  capital  is  more 
exposed  to  accidental  destruction  than  that  of  ships  and 
their  cargo.  Then  as  the  qualities  of  forethought  and 
prudence  developed  in  modern  society,  we  witnessed  the 
inauguration  of  fire  insurance  which  guarantees  the  owner 
of  a  house  against  loss  by  fire. 

Again,  the  productive  force  of  man,  the  principal 
source  of  wealth,  is  exposed,  like  material  capital,  to  sud- 
den destruction.  Death  is  inevitable  and  it  often  strikes 
down  the  young  and  strong.  When  it  cuts  off  the  head 
of  a  family  it  not  only  deprives  society  of  a  worker,  but 
often  robs  the  household  of  its  support  and  perhaps  leaves 
it  without  a  source  of  livelihood.  Insurance  may  in  such 
event  minister  to  the  needs  of  the  family.  Life  insurance 
is  one  of  the  most  commendable  manifestations  of  fore- 
thought and  character.  Mutual  aid  societies  likewise 
come  under  the  head  of  preservative  consumption.  By 
means  of  monthly  payments,  not  large,  they  provide:  in 
case  of  sickness,  for  medical  attendance  and  supplies  and  a 
daily  allowance  in  lieu  of  suspended  earnings ;  in  the  event 
of  death,  the  cost  of  interment  and  often  a  certain  sum  for 
widow  or  children.  It  is  a  form  of  insurance  most  neces- 
sary for  wage-earners,  whom  sickness  and  enforced  idle- 
ness consequent  thereon  often  reduce  to  the  last  extremity. 


284  Elements  of  Political  Economy 

Resume 

Consumption  is  the  legitimate  end  of  wealth.  To 
consume  wealth  is  to  destroy  its  utility. 

We  may  distinguish  between  :  reproductive  and  unpro- 
ductive, slow  and  rapid,  and  private  and  public  consump- 
tion. 

Reproductive  consumption  applied  to  matter  includes 
the  cost  of  production  and  capitalization;  applied  to  per- 
sons, it  includes  the  cost  of  maintenance  and  of  education. 

The  measure  of  luxury  which  each  person  can  allow 
himself  depends  upon  his  income.  Everyone  should 
divide  his  income  into  two  parts ;  the  first  to  be  devoted 
to  necessaries  (maintenance  and  proper  savings)  ;  the  sec- 
ond to  be  available  for  luxuries. 

A  growth  in  the  consumption  of  luxuries  is  permis- 
sible in  a  society  whose  wealth  is  growing. 

It  is  inaccurate  to  say  that  luxury  promotes  com- 
merce; because  the  nature  of  the  thing  consumed  may 
fail  to  exercise  a  favorable  influence  on  the  sum  of  labor 
at  command. 

Insurance  is  a  form  of  preservative  consumption.  Its 
object  is  to  guarantee  repayment  of  capital  in  case  of  acci- 
dental loss. 

It  eliminates  the  element  of  hazard  by  division  of  risk 
through  associations  whose  operations  are  based  upon 
definite  calculations. 

The  principal  forms  of  insurance  are :  on  the  one  hand, 
maritime  and  fire  insurance  which  guarantee  material 
capital;  on  the  other,  life  insurance  and  mutual  aid  so- 
cieties. 


PART  V 

FINANCE 

112.  Consumption  by  the  State  and  the  Principle  of  Taxation. 
113.  Distributing  the  Burden;  Single  and  Multiple  Taxes.  114. 
Direct  and  Indirect  Taxes.  115.  Classification  of  Taxes.  116. 
Budgets.  117.  Necessary  and  Facultative  Expenditures.  118.  Local 
Budgets.     119.  Loans.     120.  Debts. 

112.  Consumption  by  the  State  and  the  Principle  of 
Taxation. — The  word  state  designates  a  group  of  men 
who  have  a  distinct  and  formal  political  existence ;  in  most 
cases,  among  civilized  peoples,  a  nation.  It  includes, 
besides  the  nation  or  people,  the  territory  which  the  nation 
occupies  and  the  government  which  rules  it. 

In  a  certain  way  the  state  is  society  organized.  It  is 
a  condition  precedent  to  the  security  of  the  individuals 
who  inhabit  the  national  territory,  the  instrument  of  their 
will  in  connection  with  undertakings  which  call  forth  the 
collective  power  of  the  community,  the  guardian  of  the 
general  interests  and  the  general  administrator. 

To  perform  these  functions  the  state  is  called  upon  to 
make  expenditures,  i.  e.,  to  consume  wealth. 

In  half  civilized  communities,  such  as  the  pastoral 
tribes  of  nomadic  Arabs,  or  the  agricultural  peoples  of 
feudal  times,  where  the  sovereign  exercises  great  authority 
over  the  persons  of  his  subjects  to  the  detriment  of  personal 
liberty,  but  where  the  services  which  the  state  renders  are 
not  numerous  and  its  functions  quite  simple,  the  principal 
expenditures  in  time  of  peace  are  the  expenditures  of  the 
sovereign  whose  personal  budget  is  often  confounded  with 


286  Elements  of  Political  Economy 

the  state  budget,  the  two  together  forming  an  inconsider- 
able sum.  In  fact  the  insignificant  wealth  of  such  com- 
munities could  not  support  a  large  budget. 

On  the  other  hand,  in  civilized  societies  the  useful 
functions  of  the  state  are  multiplied,  developing  ordinarily 
with  the  very  demands  of  wealth.  In  such,  budgets  ac- 
cordingly become  large.  That  of  the  United  States, 
which  in  1900  was  over  886  million  dollars,  in  1840  was 
only  a  little  over  28  million  dollars.  A  similar  increase, 
in  varying  proportions,  is  observable  in  all  civilized  coun- 
tries during  the  nineteenth  century  in  the  measure  of  their 
increase  of  wealth. 

What  the  state  consumes  is  the  services  of  its  function- 
aries and  employees  of  all  kinds  and  the  supplies  intended 
for  use  in  the  course  of  administrative  and  public  work  of 
every  kind.  Moreover,  it  pays  interest  on  the  debts 
which  it  has  contracted,  and  of  which  the  capital  has  fre- 
quently been  expended  for  salaries  and  supplies.  Its  out- 
lay is  accordingly  for  salaries  and  interest  and  the  purchase 
of  commodities. 

The  state  is  the  largest  of  all  consumers.  It  fills  alone 
the  chapter  of  public  consumption  whilst  all  the  people 
together  contribute  toward  that  of  private  consumption. 
The  expenses  of  the  state  are  really  the  cost  of  administer- 
ing the  affairs  of  the  political  community.  The  members 
of  that  community  must  necessarily  pay  that  cost,  for  there 
are  no  other  means  of  procuring  the  fund  unless  by  giving 
the  state  possession  of  certain  of  the  productive  forces — a 
kind  of  socialism  injurious  to  the  national  wealth. 
(See  64.) 

It  is  proper  that  the  members  of  the  community  pay 
the  cost  since  it  is  they  who  benefit  by  the  state's  expendi- 
tures. 


Finance  287 

There  are  many  definitions  of  taxation.  Here  is  one 
which  approximately  takes  into  account  the  nature  and 
principle  of  the  thing:  Taxes  are  that  portion  of  the 
wealth  of  the  inhabitants  of  a  country  which  is  collected  to 
provide  a  revenue  for  the  political  comnmnity  and  is  de- 
voted to  the  accomplishment  of  the  functions,  and  to  the 
payment  of  the  expenses,  of  the  state.  We  may  add :  the 
levy  is  made,  in  civilized  countries,  conformably  to  law : 
it  should  be,  as  much  as  possible,  in  proportion  to  the  pre- 
sumed resources  of  those  who  pay  it  and  should  have 
regard  to  the  ease  with  which  it  can  be  collected. 

113.  Distributing  the  Burden;  Various  Systems  of 
Taxation. — To  justly  distribute  the  burden  of  taxation  is 
one  of  the  most  serious  problems  of  politics  and  political 
economy.  On  this  subject  the  latter  science  should  en- 
lighten the  former.  Taxes  are  always  a  charge.  If  this 
charge  is  unequally  distributed  it  may  become  a  crushing 
burden  for  certain  classes  even  though  the  budget  be  in  no 
wise  disproportioned  to  the  total  national  wealth.  Thus 
in  France,  before  the  revolution  of  1789,  taxes  were  un- 
duly burdensome  to  the  humble  class,  not  because  the  total 
collections  of  the  public  treasury  were  excessive,  but  by 
reason  of  the  immunity  of  favored  classes,  which  served 
to  throw  the  whole  load  on  only  a  portion  of  the  land  hold- 
ers and  farmers  and  principally  upon  the  poorest. 

How  is  the  charge  to  be  equally  distributed?  If  the 
state  could  ascertain  the  exact  income  of  each  individual 
it  would  have,  if  not  an  absolute  measure  of  ability  to  pay 
taxes  equally  applicable  under  all  conditions,  at  least  a 
criterion.  Certain  economists  insist  upon  tracing  all  pro- 
duction to  a  single  source  and  confining  all  wealth  to  a 
single  form,  and  then  instituting  on  this  basis  a  single 
tax,  pretending  to  arrive  thereby  at  a  proportional  dis- 


288  Elements  of  Political  Economy 

tribution  of  the  burden  of  taxation.  Some  believe  this 
basis  is  to  be  found  in  land,  others  in  capital,  others  again 
in  revenue  or  even  in  consumption. 

The  physiocrats  of  the  eighteenth  century  advocated  a 
single  tax  on  the  net  produce  of  land,  because  they  re- 
garded land  as  the  sole  source  of  wealth  and  they  hoped 
thereby  to  free  industry  and  commerce  from  the  many 
taxes  which  impeded  enterprise.  Somewhat  of  their  doc- 
trine was  embodied  in  the  fiscal  system  established  by  the 
French  constituent  assembly  of  1790;  but  the  foundation 
of  the  system  crumbled  away  when  political  economy 
demonstrated  that  wealth  was  produced  by  industry  and 
commerce  as  well  as  by  agriculture. 

The  single  tax  on  capital  is  based  upon  the  idea  that 
real  or  personal  property  is  the  universal  agent  of  produc- 
tion and  that  the  wealth  produced  is,  or  ought  to  be,  pro- 
portional to  the  capital  employed  in  its  production ;  that  if 
one  derives  from  his  capital  an  income  above  the  average, 
it  is  because  he  takes  greater  risks  with  it,  or  administers 
it  more  intelligently  than  others,  that,  in  either  case,  it  is 
unfair  to  make  him  pay  more  taxes  on  that  account.  If, 
on  the  other  hand,  one  derives  no  revenue  from  his  capital 
by  reason  of  leaving  it  idle  or  because  it  is  an  object  of 
personal  enjoyment,  such  as  a  private  park  or  picture  gal- 
lery, it  is  urged  that  it  is  quite  legitimate  to  make  him  pay 
for  this  indulgence  and  to  thereby  prompt  him  to  employ 
his  capital  in  a  way  which  will  be  profitable  to  him  and 
advantageous  to  society.  It  is  further  urged  that  capital, 
in  the  largest  sense  of  the  word,  embraces  all  material 
wealth  and  that  it  is  precisely  for  the  protection  of  wealth 
that  the  state  makes  its  greatest  outlay. 

Their  system  is  less  narrow  than  that  of  the  physio- 


Finance  289 

crats :  capital  is  in  fact  a  much  broader  basis  for  the  levy  of 
taxes  than  land  which  is  only  one  form  of  capital. 

But  how  can  an  exact  inventory  of  the  wealth  of  a 
nation  be  made?  If  fixed  capital  is  reachable — and  this 
is  not  always  the  case — personalty  easily  escapes  the  vigi- 
lance of  the  appraiser.  Hence  the  basis  being  incomplete, 
no  equitable  distribution  of  the  burden  is  possible.  This 
is  why  certain  writers  propose  to  tax  only  real  estate,  but 
that  term  does  not  mean  the  same  thing  to  all  of  them, 
and  if  it  did,  their  basis  would  still  be  too  narrow. 

Moreover  is  it  just  to  tax  unproductive  capital  the  same 
as  the  most  productive  capital,  to  punish,  for  example,  the 
manufacturer  for  the  changing  commercial  conditions 
which  oblige  him  to  close  his  establishment?  Shall  the 
tax  department  leave  him  no  other  alternative  than  to  pay 
or  demolish  his  factory?  On  the  other  hand,  is  it  only 
material  capital  which  enables  men  to  support  themselves  ? 
The  lawyer  who  owns  perhaps  personal  property  worth 
5,000  dollars  and  earns  10,000  dollars  a  year  at  his  profes- 
sion without  saving  any  of  it ;  the  painter  who  pays  out  a 
few  hundred  dollars  for  rent  and  supplies  and  earns  as 
many  thousand,  are  these  men  not  quite  as  capable  of  mak- 
ing their  contribution  to  the  public  revenue  as  the  mill 
owner  who  by  his  industry,  intelligence  and  economy  has 
added  his  present  large  capital  to  the  general  wealth  of  the 
nation  and  perhaps  finds  difficulty  in  earning  an  average 
of  six  per  cent,  on  it? 

A  single  tax  on  revenue,  is  this  more  equitable?  Cer- 
tainly taxes  in  proportion  to  each  man's  revenue  is  a  seduc- 
tive idea  and  in  many  instances  may  be  a  principle  of 
justice.  But  income,  as  well  as  capital,  is  difficult  of  as- 
certainment ;  it  is  easily  concealed  and  varies  from  year  to 
year.     Even  admitting  that  it  is  possible  to  ascertain  the 

19 


290  Elements  of  Political  Economy 

exact  income  of  everyone,  is  it  just  to  tax  it  uniformly? 
The  lawyer  whom  we  have  supposed  to  enjoy  an  income 
of  10,000  dollars  from  his  profession,  but  whom  sickness 
or  death  may  strike  down,  depriving  his  family  of  support, 
should  he  be  placed  on  the  same  footing  with  the  landed 
proprietor  whose  income  will  pass  with  the  land  to  his 
children  ? 

The  single  tax  on  consumption  is  founded  on  the  argu- 
ment that  consumption  is  the  principal  form  in  which 
income  manifests  itself,  and  that  it  is  above  all  the  circula- 
tion of  wealth  occasioned  by  consumption  which  demands 
the  protecting  vigilance  of  society.  But  is  it  easy  to  fasten 
upon  each  act  of  consumption  ?  And  a  system  of  taxation 
based  upon  such  a  principle,  would  it  not  be  fatally  vexa- 
tious ? 

Moreover  is  it  proper  to  confuse  productive  and  unpro- 
ductive consumption,  or  the  consumption  of  necessaries 
with  the  consumption  of  luxuries  ?  Furthermore,  is  per- 
sonal consumption  a  true  measure  of  the  ability  to  con- 
tribute or  even  of  the  amount  of  protection  which  the  state 
affords  to  each  man's  possessions?  A  bachelor  enjoying 
an  income  of  5,000  dollars  perhaps  lives  in  miserly  fashion 
and  consumes  less  than  the  married  man  who  earns  only 
2,000  dollars  and  rears  a  family  of  half  a  dozen  children 
on  it. 

The  single  tax  in  any  of  its  forms  is  inapplicable  to  a 
numerous  and  rich  community.  As  wealth  increases  with 
the  development  and  growth  of  economic  activity  it  be- 
comes diversified ;  taxation  should  then  become  diversified 
in  order  to  reach  the  principal  forms  of  wealth.  More- 
over when  a  state  already  levies  divers  and  important  taxes 
it  must  not,  under  the  pretext  of  equalizing  the  burden, 
add  to  the  load  of  the  taxpayer  by  creating  a  universal  tax 


Finance  291 

either  upon  capital,  income  or  consumption,  because  this 
is  placing  additional  burdens  on  certain  forms  of  wealth 
already  taxed  and  which  are  thus  subjected  to  double  tax- 
ation. 

Proportional  taxation  is  taxation  on  a  uniform  scale 
of  all  taxpayers  no  matter  what  the  amount  of  their  pos- 
sessions. Progressive  taxation  is  taxation  which  varies 
with  the  ability  to  pay,  the  rate  increasing  with  the  in- 
crease of  the  fortune  taxed.  Two  taxpayers  having  re- 
spectively incomes  of  2,000  dollars  and  20,000  dollars 
would  pay  under  the  first  system  a  uniform  tax  of  5%,  i.  e., 
100  dollars  and  1,000  dollars.  Under  the  second  system 
they  might  be  subject  to  a  rate  of  5%  and  15%  respect- 
ively, which  would  make  their  respective  annual  taxes 
100  dollars  and  3,000  dollars.  The  tax  may  appear  to  be 
progressive  without  being  so  in  reality.  Such,  for  exam- 
ple, is  the  charge  upon  personalty  in  Paris :  it  is  pro- 
gressive according  to  rent,  a  double  rental  being  supposed 
to  correspond  to  an  income  of  the  occupier  more  than 
double.  In  a  limited  number  of  cases  taxation  may  be 
effectively  progressive  without  ceasing  to  be  legitimate. 
The  inheritance  tax  may  be  progressive,  not  in  accordance 
with  the  value  of  the  estate,  but  in  accordance  with  the 
degree  or  distance  of  relationship. 

But  a  general  progressive  tax  would  end  in  confiscation 
of  large  fortunes,  an  act  of  injustice  which  would  discour- 
age the  most  capable. 

In  choosing  between  different  kinds  of  taxes,  we  should 
cling  to  those  which  approximate  most  closely  proportional 
taxation,  to  taxes  the  collection  of  which  is  the  least  arbi- 
trary and  of  which  the  taxpayer  can  readily  understand 
the  mode  of  assessment,  to  taxes  which  entail  the  least  cost 
of  collection  and  to  taxes  the  collection  of  which  can  be 


292  Elements  of  Political  Economy 

relegated  to  seasons  of  the  year  when  the  taxpayer  is  best 
prepared  to  pay. 

From  the  standpoint  of  political  expediency,  no  tax 
should  be  imposed  without  the  consent  of  the  people  as  ex- 
pressed by  their  representatives,  and  as  we  cannot  realize 
the  ideal  of  a  perfectly  equitable  distribution  of  the  burden 
of  taxation,  the  greatest  prudence  should  be  exercised  in 
regard  to  altering  taxes  because  the  inequalities  of  an  old 
tax  to  which  particular  interests  have  accommodated  them- 
selves and  in  connection  with  which  the  principle  of  the 
incidence  of  taxation  has  come  fully  into  play  in  the  course 
of  time,  are  less  vexatious  than  the  inequalities  of  a  new 
tax  would  be  supposing  it  were  theoretically  as  unequal  as 
the  old. 

114.  Direct  and  Indirect  Taxes. — Taxes  are  fre- 
quently divided  into  two  great  classes ;  direct  and  indirect. 
At  first  sight  the  distinction  appears  clearer  than  it  really 
is ;  statesmen  and  economists  are  far  from  being  in  accord 
with  respect  to  their  meaning. 

However,  one  may  say  that  direct  taxes  are  those 
which  are  imposed  directly  on  persons,  like  the  capitation 
tax,  or  on  the  possessions  or  use  of  goods,  like  the  land 
tax.  Their  object  is  to  reach  the  possessions  of  the  tax 
payer  directly. 

Indirect  taxes,  on  the  other  hand,  are  those  which  are 
imposed  upon  wealth  in  connection  with  some  incidental 
fact:  act,  exchange,  fabrication,  transport,  etc.,  with  no 
intention  of  proportioning  the  tax  to  the  fortune  of  the 
owner  of  the  wealth. 

Direct  taxes  may  be  variable,  like  the  property  tax  of 
our  cities  which  varies  according  to  the  total  sum  required 
for  municipal  purposes  for  the  year ;  or  fixed  like  the  trade 


Finance  293 

licenses  which  ordinarily  remain  the  same  from  year  to 
year. 

Direct  taxes  are  generally  less  susceptible  than  indirect 
taxes  of  increase  or  diminution  in  accordance  with  the  an- 
nual variations  in  the  production  of  wealth ;  they  have  the 
quality  of  being  relatively  fixed.  Indirect  taxes  are  more 
flexible:  the  returns  from  them  increase  with  the  increase 
of  wealth  and  consumption,  and  in  prosperous  times  supply 
the  public  treasury  abundantly  without  any  increase  of 
the  tax  itself. 

The  divers  inconveniences  and  advantages  of  these  two 
kinds  of  taxes  lead  to  the  introduction  of  both  together 
into  the  budget  of  a  great  country,  because  they  lend 
assistance  in  the  effort  to  reach  the  different  forms  of 
wealth,  and,  when  taken  together,  offer  some  compensation 
for  each  other's  defects. 

115.  Classification  of  Taxes. — ^The  distinction  be- 
tween direct  and  indirect  taxes  is  not  sufficiently  precise 
to  serve  as  the  basis  of  a  logical  classification.  Moreover, 
no  classification  ought  to  be  rigorous  since  there  are  taxes 
which  strike  at  the  same  time  different  classes  of  persons 
and  goods.  Nevertheless  we  may  distinguish  roughly 
between  taxes  on  persons,  such  as  the  capitation  tax  and 
immigration  tax,  and  taxes  on  things,  the  latter  embracing 
taxes  on  production,  distribution  and  consumption. 

116.  The  National  Budget. — A  state,  like  an  indi- 
vidual, is  obliged  to  take  account  of  its  receipts  and  dis- 
bursements in  order  to  balance  the  one  with  the  other, 
and  in  order  to  avoid,  on  the  one  hand,  the  squandering  of 
money,  and,  on  the  other,  the  neglect  of  services  necessary 
to  the  public  welfare.  This  is  what  is  provided  by  the 
budget,  which  is  a  detailed  statement  of  estimated  receipts 
and  expenditures. 


294  Elements  of  Political  Economy 

Under  the  parliamentary  form  of  government,  the 
budget  is  discussed  and  voted  by  the  legislative  power.  It 
thereby  becomes  a  law  which  is  mandatory  upon  the  execu- 
tive power  and  by  virtue  of  which  the  latter  collects  the 
taxes  and  makes  the  payments  authorized  for  the  fulfill- 
ment of  the  public  service.  In  the  United  States  the  ap- 
proval of  the  President  is  necessary  before  the  Appropria- 
tions Bill  becomes  a  law,  and  he  has  the  right  to  veto  all  or 
any  part  of  it.  This  latter  power,  if  conscientiously  exer- 
cised, may  accomplish  the  defeat  of  dishonest  measures. 

It  is  not  always  possible  for  budgets  to  be  rigorously 
exact,  but  generally  speaking,  the  financial  administration 
of  a  government  is  so  much  the  better  according  as  it  con- 
fines itself  strictly  within  the  limits  of  the  expenses  fixed 
by  the  estimates. 

The  sources  of  national  revenue  vary  greatly  in  differ- 
ent countries,  but  most  countries  derive  their  principal 
revenue  from  what  we  term  import  duties  and  internal 
revenue  taxes,  including  heavy  taxes  on  wines,  liquors  and 
tobaccos,  sometimes  in  the  form  of  a  government  mo- 
nopoly of  the  latter  of  these  commodities.  In  certain 
countries  the  income  tax  and  inheritance  tax  are  important 
sources  of  revenue.  In  1903  over  90  per  cent,  of  the  net 
ordinary  receipts  of  the  United  States  government  was 
derived  from  these  two  sources,  namely :  customs  and  in- 
ternal revenue.  An  income  tax  was  collected  in  the 
United  States  from  1863  to  1877,  the  total  amount  col- 
lected in  this  period  being  about  347  million  dollars.  It 
is  a  just  tax  more  readily  collected  than  the  tax  on  per- 
sonalty. 

In  the  United  States  personalty  is  being  reached  more 
generally  of  late  through  the  tax  on  industrial  corpora- 
tions,  formed  in   great  numbers  in  recent  years.     The 


Finance  295 

corporations  are  compelled  to  pay  the  tax  directly  before 
paying  dividends  on  their  stock.  But  where  it  has  been 
attempted  to  find  the  personalty  in  the  hands  of  the  owner 
and  tax  it,  the  effort  has  uniformly  failed. 

No  form  of  tax  is  more  equitable  nor  more  advisable 
from  the  standpoint  of  social  expediency  than  the  inher- 
itance tax.  The  person  who  has  not  yet  enjoyed  the  pos- 
session of  a  given  property,  and  whose  expenses  or  scale 
of  living  or  business,  are  not  dependent  upon  it  for  their 
continuance,  does  not  seriously  feel  the  loss  of  the  portion 
of  an  inheritance  which  the  state  may  retain  for  public 
purposes.  In  fact  there  cannot  be  said  to  be  a  loss  to  him 
but  rather  a  smaller  gain.  The  charge  that  the  inheritance 
tax  discourages  enterprise  and  thrift,  cannot  be  substanti- 
ated, since  the  desire  to  leave  a  given  sum  to  his  heirs  may 
lead  to  that  much  additional  enterprise  and  thrift  if  the 
testator  knows  that  a  certain  portion  of  the  estate  will  be 
deducted  before  the  property  reaches  his  heirs. 

Moreover  the  interests  of  production  counsel  the  tax- 
ation of  wealth  already  created. 

117.  Obligatory  and  Facultative  Expenses. — The  ex- 
penses of  the  state  are  partly  obligatory  and  partly  facul- 
tative. They  may  be  divided  also  into  expenses  necessary 
to  enable  the  state  to  discharge  its  obligations,  and  which 
are  therefore  all  obligatory,  expenses  for  maintenance 
which  are  for  the  most  part  obligatory,  expenses  in  the 
interest  of  progress  and  expenses  for  luxury,  which  are  in 
part  facultative. 

In  the  first  group  are  included  payment  of  the  pecun- 
iary obligations  of  the  state,  such  as  the  public  debt  and 
pensions,  on  which  a  government  cannot  default  without 
putting  itself  in  the  position  of  a  merchant  who  has  failed. 
In  the  second  appear  the  services  relating  to  the  public 


296  Elements  of  Political  Economy 

security  and  social  order,  such  as  the  army,  the  courts  of 
justice,  poHce,  civil  administration  and  works  necessary 
to  the  preservation  of  the  public  domain,  including  build- 
ings, roads,  etc. ;  in  the  third,  new  undertakings,  public 
instruction,  encouragement  of  industry;  in  the  fourth, 
embellishment. 

The  amount  of  expense  which  each  of  these  services 
entails  is  fluctuating.  As  the  demands  of  the  public  in- 
crease or  the  value  of  money  diminishes,  the  state  has 
more  services  for  which  to  pay  and  finds  them  dearer 
without  being  better  served.  Certain  services,  facultative 
at  one  period,  become  obligatory  at  another ;  for  example : 
The  United  States  Government  in  the  earlier  years  of  its 
existence  did  not  feel  obligated  to  spend  any  money  on 
internal  improvements.  In  fact  it  was  questioned 
whether  the  government  had  the  right  under  the  constitu- 
tion to  extend  its  activities  to  this  field.  In  the  year  1822 
the  appropriations  for  the  improvements  of  rivers  and 
harbors  was  a  little  over  22,000  dollars — in  1903  it  was 
54  million  dollars. 

It  is  essential,  to  good  administration  of  the  finances, 
to  regulate  the  outlays  in  ordinary  times  as  much  as  pos- 
sible by  prospective  income.  Under  extraordinary  cir- 
cumstances, such  as  a  defensive  war  or  great  calamity, 
the  state  should  not  hesitate  to  make  the  necessary  outlay, 
no  matter  how  large,  even  though  it  should  create  a  debt 
which  may  weigh  upon  the  taxpayer  for  years ;  this  is  a 
consequence  of  social  solidarity. 

But  except  under  such  circumstances,  it  is  the  duty 
of  the  government  to  manifest  the  strictest  economy  in 
handling  the  people's  pennies.  There  are  always  plaus- 
ible motives  for  expense.  Under  absolute  governments, 
the  sovereign  is  exposed  to  the  temptation  of  incurring 


Finance  297 

them  to  satisfy  his  caprice.  Under  democratic  govern- 
ments where  the  sovereign  power  resides  in  the  people 
and  is  delegated  by  them  to  their  representatives,  the  ad- 
ministration is  in  danger  of  being  carried  away  by  the 
wishes  of  the  legislature  which  is  tempted  constantly  to 
undertake  new  measures  either  useful  to  the  country  or 
pleasing  to  their  constituents.  But  the  administration 
and  the  legislatures  should  both  remember  at  all  times 
the  source  of  the  money  demanded  and  the  productive 
use  which  the  taxpayer  might  make  of  it  if  the  money 
were  not  required  by  the  state. 

When  a  new  form  of  wealth  is  produced,  it  is  just  to 
tax  it ;  a  source  of  increase  to  the  public  revenue.  When 
the  national  wealth  increases,  the  returns  of  fixed  taxes 
and  of  taxes  on  consumption  are  larger  without  the  tax 
itself  undergoing  a  change;  another  source  of  increase  to 
the  public  revenue.  But  in  ordinary  times  existing  taxes 
should  not  be  increased  unless  it  is  plain  that  they  are  not 
large  enough,  nor  should  a  new  tax  be  placed  upon  a  form 
of  wealth  already  taxed. 

For  the  state  to  expend  more  than  it  receives,  i.  e.,  to 
have  an  annual  deficit,  and  continue  this  deficit  year  after 
year  is  still  more  reprehensible  than  to  directly  increase 
taxes.  It  invariably  leads  to  a  period  of  financial  disorder 
and  an  increase  of  the  floating  debt,  with  the  result  that  in 
the  end  taxes  are  increased  anyway. 

The  growing  needs,  and  particularly  the  increase  of 
the  war  budget  and  public  undertakings,  led  to  a  consider- 
able increase  in  the  expenditures  of  civilized  states  during 
the  last  century.  The  budget  of  the  European  states 
amounted  in  1869  to  2,050  million  dollars:  in  1900  it 
amounted  to  4,506  million  dollars. 

Of  course  there  has  been  a  great  increase  of  popula- 


298  Elements  of  Political  Economy 

tion  and  wealth  during  this  period ;  the  latter  has  increased 
even  more  rapidly  than  the  former.  But  one  is  forced 
to  the  conclusion  that  whilst  public  works  are  ordinarily 
productive,  the  great  increase  of  the  military  budget  and 
increase  of  national  debts  has  proven  hostile  to  the 
economic  interests  of  the  various  countries  and  weakens 
the  springs  of  European  wealth. 

118.  Local  Budgets. — Beside  the  great  political 
community  which  constitutes  the  nation  there  are  smaller 
administrative  areas,  such,  for  example,  as  the  separate 
states,  counties  and  municipalities  in  the  United  States, 
disbursing  large  sums  of  money. 

In  America  and  England  the  practice  is  to  lay  special 
taxes  for  local  purposes,  but  in  France  the  departments 
and  communes  raise  a  large  part  of  their  revenue  by  what 
is  known  as  the  centimes  additionnels,  i.  e.,  extra  pennies 
added  to  the  national  levy.  Their  needs  dictate  the  num- 
ber of  pennies  to  be  so  added,  but  the  system  deprives 
them  of  all  freedom  of  choice  in  the  matter  of  the  kind 
of  taxes  to  be  imposed.  Besides  this,  French  municipal- 
ities collect  at  the  city  gates  an  octroi  or  tax  on  food 
supplies  entering  the  city,  and  like  the  nation  have  their 
public  domains  which  are  productive  of  revenue.  They 
own  land,  forests,  abattoirs,  cemeteries  and  monopolies 
such  as  the  water  and  gas  services,  which  they  operate  or 
lease. 

In  the  United  States  the  most  important  source  of 
local  revenue  is  the  tax  on  real  estate.  Supplementing 
this  are  found  taxes  on  personal  property,  and  on  fran- 
chises and  the  liquor  license.  With  the  formation  of  in- 
dustrial corporations  arose  the  possibility  of  taxing  per- 
sonal property  much  more  effectively  than  was  previously 
the  case,  as  the  tax  is  charged  to  the  corporation  and  must 
be  met  before  dividends  are  paid. 


Finance  299 

Local  taxation  and  expenditure  is  not  usually  free 
from  control  by  some  higher  political  body.  In  the 
United  States  the  municipal  taxation  and  debt  is  generally 
controlled  by  the  state  in  which  the  municipality  is  situ- 
ated. In  France  the  fiscal  policy  of  the  departments  and 
communes  is  subject  to  the  control  of  the  central  govern- 
ment and  this  is  true  likewise  of  the  counties  and  munic- 
ipalities in  England. 

119.  Loans. — There  are  circumstances  under  which 
the  ordinary  revenue  is  inadequate.  The  three  principal 
are:  a  war  which  it  is  necessary  to  prosecute;  a  serious 
and  persistent  deficit  which  must  be  met;  great  public 
works  which  are  urgent  or  which  it  would  be  quite  profit- 
able to  execute. 

In  vain  have  certain  economists,  alarmed  beyond 
measure  by  the  consequences  of  loans,  tried  to  prove  that 
under  such  circumstances,  it  is  better  to  impose  heavy 
taxes  than  encumber  the  future ;  no  taxes  that  could  have 
been  devised  would  have  provided  the  funds  for  the 
American  Civil  war  nor  the  indemnity  which  France  was 
compelled  to  pay  to  Germany  in  1871.  Neither  can  we 
pretend  that  a  state,  like  an  individual,  may  draw  upon 
its  capital  when  its  revenue  is  deficient.  With  certain 
exceptions,  such  as  the  war  chests  which  some  states 
maintain,  the  capital  of  a  state  is  composed  solely  of  realty, 
some  of  which,  like  the  public  monuments,  are  unproduc- 
tive, other  of  which,  like  the  forest  reserves,  could  not  be 
alienated  to  any  extent  without  serious  prejudice  to  the 
future  welfare  of  the  community.  It  is  accordingly 
necessary  and  legitimate  at  times  to  have  recourse  to  loans. 

When  the  loan  is  made  for  the  purpose  of  prosecuting 
a  war  which  was  inevitable,  or  to  discharge  obligations 
which  resulted  from  it,  political  economy  does  not  pretend 


300  Elements  of  Political  Economy 

to  dispute  the  dictum  of  politics.  When  it  is  made  for  the 
purpose  of  restoring  equilibrium  in  the  budget  destroyed 
by  an  excessive  floating  debt,  it  is  nearly  always  justifi- 
able, since  it  frees  the  finances  from  arrears  which  affect 
the  public  credit.  When  it  is  made  for  public  works  di- 
rectly productive  of  public  revenue,  or  likely  to  increase 
the  public  revenue  indirectly  by  increasing  the  national 
wealth,  it  may  prove  advantageous.  Loans  of  this  nature 
may  be  justified  on  the  ground  that  the  present  generation 
ought  not  to  bear  the  whole  burden  resulting  from  a 
national  crisis  or  from  the  perfectionment  of  the  social 
machinery.  It  is  proper  that  future  generations,  in  the 
name  of  social  solidarity,  should  accept  their  share,  since 
they  likewise  will  reap  the  benefit  of  the  expenditure. 

Loans  are  of  various  kinds.  A  forced  loan  is  a  kind  of 
extraordinary  tax  which  the  state  levies  upon  private  for- 
tunes and  of  which  it  engages  to  pay  the  interest  and 
sometimes  to  repay  the  principal  within  a  specified  period. 
The  burden  of  such  a  tax  is  such  that  most  taxpayers 
cannot  meet  it  without  impairing  their  capital  and  the 
inevitable  inequalities  of  the  tax  make  it  highly  unjust 
and  injurious. 

Some  governments  sell  annuities ;  i.  e.,  in  consideration 
of  a  present  sum,  the  government  makes  an  annual  pay- 
ment during  the  life  of  the  pensioner.  This  is  simply  a 
form  of  borrowing  on  the  part  of  the  government. 

A  third  form  of  loan  is  the  loan  redeemable  at  the 
end  of  a  fixed  period.  Certain  of  the  French  cities  which 
are  forbidden  to  contract  perpetual  loans,  add  to  the  re- 
deemable loan  a  lottery  feature  under  which  a  large 
premium  is  paid  on  the  redemption  of  bonds  whose  num- 
ber is  determined  by  lot.     This  lottery  feature  attracts 


Finance  '  301 

capital,  especially  in  small  sums,  and  enables  the  com- 
munity to  borrow  at  a  lower  rate  of  interest. 

Perpetual  loans  consist  in  the  emission  of  obligations 
which  the  state  does  not  promise  to  redeem  at  any  specified 
time,  but  which  it  is  not  prevented  from  redeeming  should 
it  suit  its  purposes  at  any  time  to  do  so.  This  is  to-day 
the  most  common  form  of  borrowing  practiced  by  states. 
In  an  era  of  falling  interest  rates  distinct  advantages  at- 
tach to  the  convertible  loan  which  may  be  redeemed  at  the 
option  of  the  state  after  a  short  term  of  years. 

The  emission  may  be  made  by  inviting  public  subscrip- 
tion in  which  any  one  may  participate,  or  through  the  in- 
strumentality of  bankers  who  subscribe  for  the  whole  loan 
with  a  view  to  placing  it  with  their  clients  at  a  profit. 

Even  public  subscription,  in  which  bankers  likewise 
largely  participate,  does  not  result  in  the  loan  being  placed 
at  the  beginning  in  the  hands  of  capitalists  destined  to 
retain  it.  It  is  for  a  time  the  object  of  speculation.  More 
or  less  of  it  always  remains  in  the  hands  of  bankers  and 
the  offer  and  demand  of  this  portion,  together  with  such 
as  comes  for  various  reasons  out  of  the  hands  of  private 
holders  from  time  to  time,  determine  the  market  quotation 
of  the  loan.  These  quotations,  which  often  vary  for 
causes  accidental  and  without  real  importance,  nevertheless 
in  their  general  trend  furnish  a  useful  indication:  first, 
of  the  credit  of  the  state;  second,  of  the  abundance  or 
scarcity  of  loanable  capital. 

120.  Debts. — There  are  two  kinds  of  debt,  floating 
debt  and  funded  debt. 

The  floating  debt  embraces  the  sums  which  the  state 
owes  its  creditors  irrespective  of  loans.  The  principal 
cause  of  its  existence  is  the  deficit,  i.  e.,  excess  of  expendi- 
ture over  receipts.     To  meet  this  deficit  the  state  usually 


302  Elements  of  Political  Economy 

issues  short-time  notes  bearing  interest.  It  renews  them 
according  to  its  needs  or  pays  them  when  the  condition 
of  the  national  treasury  permits.  Another  cause  of  float- 
ing debts  is  found  in  the  daily  needs  of  the  public  treasury. 
A  state  whose  receipts  may  not  coincide  in  point  of  time 
with  its  disbursements  is  compelled  to  make  use  of  treas- 
ury notes.  For  these  reasons  floating  debts  cannot  be 
entirely  avoided. 

But  a  heavy  floating  debt,  continued  through  a  series 
of  years,  is  a  source  of  embarrassment  and  an  indication 
of  faulty  financiering.  Although  it  nearly  always  costs 
the  state  less  interest  than  a  funded  debt,  it  is  better,  as 
has  been  observed,  to  make  a  loan  in  order  to  fund  a  float- 
ing debt  which  has  become  excessive,  than  to  permit  it 
indefinitely  to  weigh  upon  the  budget. 

The  debt,  properly  speaking,  embraces  all  funded 
loans.  The  institution  of  credit  is  of  ancient  origin  but 
its  great  development  is  comparatively  recent.  Industry 
and  commerce  have  made  a  liberal  use  of  it  during  the  last 
century,  and  governments  have  done  the  same;  at  times 
to  their  detriment,  in  that  it  has  led  to  prodigality  or  to 
ambitious  wars;  at  times  beneficially,  aiding  in  the  de- 
velopment of  social  equipment.  Loans  have  multiplied 
with  the  facility  of  placing  them  and  public  debts  have 
grown  accordingly. 

In  France  and  in  England,  as  in  all  countries  where 
the  local  communities  are  under  the  financial  tutelage  of 
the  centra]  government,  local  debt,  however  excessive  it 
may  be  at  times,  is,  as  we  have  seen,  nevertheless  under  the 
surveillance  of  the  government. 

^  But  there  exists  no  such  surveillance  for  the  central 
government  itself,  and  there  are  some  countries,  such  as 
the  United  States,  where  it  does  not  exist,  for  local  units 


Finance  303 

such  as  the  separate  states.  In  such  cases  the  increase  of 
debt  finds  no  Hmit  other  than  the  wisdom  of  the  govern- 
ment and  the  credit  of  the  community.  Impulse  may 
impair  this  wisdom  and  credit  may  suffer  a  serious  decHne 
without  actually  preventing  the  floating  of  loans,  causing 
them  simply  to  be  floated  on  disadvantageous  terms. 
Thus  the  debts  of  nearly  all  the  states  of  Europe  and 
America  have  increased  during  the  last  century. 

There  are  various  ways  in  which  a  state  may  lighten 
the  burden  of  its  debt. 

When  it  has  contracted  a  debt  during  a  crisis,  it  has 
done  it  nearly  always  under  onerous  conditions,  because 
its  credit  was  then  depressed.  When  better  times  come, 
and  the  state  can  borrow  at  a  lower  rate  of  interest,  not 
only  has  it  the  right  to  refund  the  debt  just  as  every  pri- 
vate creditor  has  the  right  to  discharge  a  debt  when  there 
exists  no  agreement  to  the  contrary,  but  it  is  its  duty  to 
do  so  for  the  reason  that  its  business  is  to  avoid  wasting 
the  taxpayers'  money,  and  not  to  provide  a  revenue  for 
money  lenders.  With  this  object,  it  issues  a  loan  at  a 
lower  rate  of  interest,  offering  to  the  holders  of  the  old 
debt  either  payment  at  par,  which  it  effects  with  the  pro- 
ceeds of  the  new  loan,  or  substitution,  if  they  so  prefer, 
of  the  new  obligations  at  the  reduced  interest.  This  is 
termed  converting  the  debt. 

In  this  process  the  state  may  purchase  its  obligations 
on  the  open  market  and  retire  them,  thus  diminishing  the 
principal  of  the  debt  and  the  annual  interest  charge;  this 
is  termed  amortization.  This  gradual  retirement  is  pro- 
vided for  by  the  same  law  which  authorizes  the  loan  when 
that  law  sets  aside  a  certain  sum  each  year  for  the  purchase 
of  the  debt.  The  advantage  of  such  a  system  is  that  it 
makes  amortization  obligatory.     But  it  also  has  the  grave 


304  Elements  of  Political  Economy 

inconvenience  of  reducing  the  funded  debt  at  the  cost  of 
increasing  the  floating  debt  when  there  is  a  deficit  in  the 
budget. 

When  retirement  is  optional  it  takes  place  only  when 
there  is  a  surplus  in  the  budget.  This  is  true  reduction, 
really  lightening  the  burden  of  the  treasury.  But  here 
again  we  find  an  imperfection,  viz. :  the  purpose  of  the  law 
is  easily  defeated  by  the  public  authorities  making  other 
use  of  the  surplus. 

Is  it  for  the  best  interests  of  a  state  to  continue  a  heavy 
debt  or  to  endeavor  to  discharge  it  promptly?  To  sup- 
pose that  a  debt  is  useful  to  a  state  is  an  error ;  that  which 
is  useful  is  to  have  the  credit.  Now  the  credit  of  a  state 
depends  upon  the  wealth  of  the  state  and  upon  the  reputa- 
tion it  enjoys  for  scrupulously  meeting  its  engagements 
and  paying  its  debts,  a  reputation  which  is  not  acquired 
in  a  day.  Of  course,  as  the  wealth  of  a  country  increases 
the  burden  of  the  debt  is  less  felt  because  the  nation,  hav- 
ing become  stronger,  carries  it  more  lightly;  but  this 
process  cannot  take  the  place  of  actual  retirement  or  dis- 
charge of  the  debt.  If,  at  the  moment  when  the  expense 
has  been  incurred,  it  may  be  just  to  distribute  the  burden 
over  a  series  of  years  by  means  of  a  loan,  it  would  at  the 
same  time  be  unjust  to  make  the  charge  perpetual  and  to 
thus  throw  it  upon  the  shoulders  of  a  generation  too  dis- 
tant to  benefit  by  the  outlay.  The  existing  generation 
has  no  right  to  dispose  in  advance  of  a  large  portion  of 
the  revenue  of  posterity  and  thus  to  prevent  it  from  mak- 
ing the  use  of  its  revenue  which  it  deems  best. 

Accordingly,  both  the  interest  and  duty  of  the  state  lie 
in  the  direction  of  discharging  the  public  debt,  either  by 
amortization  which  shall  be  regular  and  obligatory  or  ir- 
regular and  dependent  upon  the  occurrence  of  a  surplus, 


Finance  305 

or  by  additional  taxes  the  proceeds  of  which  shall  consti- 
tute a  sinking  fund  calculated  to  discharge  the  debt  in  a 
given  number  of  years.  This  is  a  wise  rule,  but  one  which 
states  do  not  often  follow.  Some,  however,  such  as  the 
United  States  after  the  Civil  War,  have  set  a  memoral^le 
example  in  this  regard. 

Resume 

The  disbursements  of  the  state  are  for  wages,  interest 
and  supplies ;  they  constitute  the  cost  of  administering  tlie 
affairs  of  the  political  community. 

Taxes  are  that  portion  of  the  wealth  of  the  inhabitants 
of  a  country  levied  in  order  to  provide  a  revenue  for  the 
political  community  and  devoted  to  the  fulfillment  of  the 
functions  of  the  state  and  to  the  payment  of  its  debts. 

The  levy  should  be  in  conformance  with  law,  should 
be  tempered  to  the  presumed  ability  of  the  taxpayer  to 
meet  the  charge,  and  should  be  collectable  without  diffi- 
culty. 

The  single  tax,  no  matter  upon  what  it  may  be  based, 
whether  upon  land,  capital,  income,  or  consumption,  is 
inapplicable  to  a  rich  and  large  community. 

Progressive  taxation  might  easily  lead  to  confiscation. 

Desirable  qualities  for  a  tax :  to  approximate  propor- 
tionally, to  lend  itself  as  little  as  possible  to  arbitrary 
action,  to  involve  the  smallest  cost  of  collection,  to  have 
been  consented  to  by  the  people's  representatives,  and  to 
change  as  seldom  as  possible. 

There  is  a  distinction  between  direct  taxes,  such  as  the 
capitation  tax  and  trade  licenses  which  are  fixed,  and  in- 
direct taxes  which  are  more  flexible  and  yield  an  increase 
of  revenue  with  the  growth  of  wealth  and  consumption. 

The  budget  is  a  detailed  statement  specifying  in  ad- 
20 


3o6  Elements  of  Political  Economy 

vance  the  probable  receipts  and  disbursements  of  the  state. 

The  financial  administration  of  a  government  is  so 
much  the  better  according  as  it  limits  itself  scrupulous!}' 
to  the  disbursements  provided  for  by  the  budget. 

The  expenses  of  the  state,  obligatory  and  facultative, 
may  be  divided  into  expenses  for  the  discharge  of  moral 
obligations,  expenses  of  maintenance,  of  progressive  de- 
velopment and  of  luxury. 

In  ordinary  times  expenses  should  be  accommodated 
to  receipts.  Chronic  deficits  are  more  objectionable  than 
increase  of  taxes. 

Public  loans  are  justified  in  the  emergency  of  war  or 
of  a  persistent  deficit  and  for  public  works. 

The  principal  modes  of  borrowing  are  by  means  of  a 
forced  loan,  by  the  sale  of  annuities,  by  the  issue  of  gov- 
ernment bonds,  either  perpetual  or  maturing  at  a  specified 
time. 

The  two  principal  forms  of  public  debt  are  the  floating 
debt  and  the  funded  debt.  An  inordinate  floating  debt 
is  a  source  of  embarrassment  and  a  sign  of  inefficient  ad- 
ministration of  the  finances. 

A  state  may  lighten  the  burden  of  its  debt  by  exchang- 
ing its  bonds  for  others  bearing  a  lower  rate  of  interest  or 
by  partly  discharging  the  principal  of  the  debt.  Consid- 
eration of  policy  and  duty  both  enjoin  the  discharge  of  the 
public  debt. 


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